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Edited  by  L.  H.  Bailet 


THE  PRINCIPLES  OF  RURAL  CREDITS 


ZCbe  HUtral  Science  Scries 


The  Soil.    King. 

The  Spraying  of  Plants.  Lode- 
man. 

Milk  and  Its  Products.  Wing. 
Enlarged  and  Revised. 

The  Fertility  of  the  Land. 
Roberts. 

The  Principles  of  Fruit-Grow- 
ing. Bailey.  20th  ed.,  re- 
vised. 

Bush-Fruits.    Card. 

Fertilizers.     Voorhees. 

The  Principles  of  Agriculture. 
Bailey.  20th  edition,  Re- 
vised. 

Irrigation  and  Drainage.  King. 

The  Farmstead.    Roberts. 

Rural  Wealth  and  Welfare. 
Fairchild. 

The  Principles  of  Vegetable- 
Gardening.    Bailey. 

Farm  Poultry.  Watson.  En- 
larged and  Revised. 

The  Feeding  of  Animals.  Jor- 
dan. 

The  Farmer's  Business  Hand- 
book.   Roberts. 

The  Diseases  of  Animals. 
Mayo. 

The  Horse.    Roberta. 


How  to  Choose  a  Farm.    Hunt. 

Forage  Crops.     Voorhees. 

Bacteria  in  Relation  to  Coun- 
try Life.    Lipman. 

The  Nursery-Book.    Bailey. 

Plant-Breeding.  Bailey  and 
Gilbert,  revised. 

The  Forcing-Book.    Bailey. 

The  Pruning-Book.    Bailey. 

Fruit-Growing  in  Arid  Regions. 
Paddock  and  Whipple. 

Rural  Hygiene.    Ogden. 

Dry-Farming.    Widtsoe. 

Law  for  the  American  Farmer. 
Green. 

Farm  Boys  and  Girls.  Mc- 
Keever. 

The  Training  and  Breaking  of 
Horses.    Harper. 

Sheep-Farming  in  North  Amer- 
ica.   Craig. 

Cooperation  in  Agriculture. 
Powell. 

The  Farm  Woodlot.  Cheyney 
and  Wentling. 

Household  Insects.    Herrick. 

Citrus  Fruits.     Coit. 

Principles  of  Rural  Credits. 
Morman. 


THE   PRINCIPLES   OF 
EURAL  CREDITS 


AS  APPLIED  IN  EUROPE  AND  AS 
SUGGESTED  FOR  AMERICA 


BY 
JAMES  B.  MORMAN,  A.M. 

WITH  AN  INTRODUCTION  BY 

JOHN  LEE  COULTER,  Ph.D. 


Nrm  fork 

THE  MACMILLAN  COMPANY 

1919 

All  rights  reserved 


COPTBIGHT,  1915 

Bt  THE  MACMILLAX  COMPANY 
Set  up  and  electrotyped.    Published  April.  1915. 


I 


TO  THE  FARMERS 

OF 

THE  UNITED  STATES  AND  CANADA, 

THIS  BOOK 

IS 

HOPEFULLY  DEDICATED 


PREFACE 

The  aim  of  this  little  book  is  to  show  how  fanners  may 
be  successfully  financed.  The  subject  is  of  general  inter- 
est and  is  attracting  much  attention  at  the  present  time. 
To  deal  with  the  question  intelligently,  however,  it  is 
necessary  to  set  before  the  American  people  the  most  re- 
liable information  on  the  subject  that  is  available,  with  a 
view  of  establishing  a  rural  credit  system  for  all  classes 
of  farmers.  Hence,  the  book  naturally  falls  into  two  parts : 
The  first  part  to  set  forth  the  information,  the  second  part 
to  show  how  it  may  be  applied  in  formulating  a  credit 
system  for  American  farmers. 

This  is  what  I  have  sought  to  do  in  the  following  pages. 
Europe  is  the  recognized  practical  field  where  all  phases 
of  rural  credit  can  be  found  in  operation.  But  conditions 
of  rural  life  are  not  comparable  on  the  two  continents. 
It  is  evident,  therefore,  that  whatever  is  done  for  organiz- 
ing rural  credit  in  the  United  States  and  Canada,  must 
be  an  adaptation  of  the  European  system.  To  this  end, 
it  seems  probable  that  legislative  action  will  soon  be  more 
pronounced  as  a  result  of  the  growing  interest  in  rural 
credits.  But  to  act  wisely  in  the  matter,  legislators  should 
have  before  them  all  essential  facts  relating  to  different 
ways  of  financing  farmers.  It  has  been  my  aim  to  present 
these  facts  in  as  concise  a  form  as  possible  not  only  for 
legislators,  but  for  our  farmers  and  the  general  public. 

vii 


viii  Preface 

For  the  promotion  of  agriculture  is  an  affair  of  the  people, 
and  nothing  will  aid  agriculture  more  than  a  sound  system 
of  rural  credits.  Information  from  various  reliable  sources 
has  been  freely  used  in  the  compilation  of  this  volume. 
The  chief  sources  of  information  are  noted  in  the  bibli- 
ography at  the  end  of  the  text. 

James  B.  Morman. 
Kensington,  Md. 
February  11,  1915. 


CONTENTS 

PAGE 

Preface  ...•••■••      V11 

Introduction:  The  Rural  Credit  Problem  and  Rural 
Credits  Commissions    ..*.'.'.'.'.       xi 

PART  I 

Methods  of  Financing  Farmers  in  European  Countries 

chapter 

I.    Personal  Credit  for  the  Landowning  Farmer     .        3 

II.    The  Rural  Banks  in  Particular       .  .  19 

III.    Government  Aro  for  Promoting  Personal  Credit 

among  Landowning  Farmers  ....  43 

rv.    Personal  Credit  for  the  Landless  Farmer      .  60 

V.    Cooperative  Farm  Mortgage  or  Long-time  Credit  76 

VI.    Non-coOperative  Farm  Mortgage  or  Long-time 

Credit •        •  9« 

vii.    non-codperative  farm  mortgage  or  long-time 

Credit — Continued   ......  120 

VIII.    Characteristics  of  European  Mortgage  Credit  139 

PART  II 

A  Constructive  Credit  System  for  American  Farmers 

LX.  The  Rural  Credit  Problem      .         .         .         .145 

X.  Conditions  of  Rural  Credit     ....     160 

XI.  Preliminary  Means  of  Promoting  Rural  Credits  178 

XII.  The  Amortization  of  Farm  Mortgages     .         .     191 

XIII.  The  Issue  of  Farm-Mortgage  Bonds         .         .     202 

XIV.  Regular  Mortgage  Loans  to  Farmers      .         .     208 

ix 


Contents 


CHAPTER  PAGE 

XV.    Financing  the  Tenant  Farmer  .        .        .221 

XVI.    The  National  Government  and  Rural  Credits  232 
XVII.    Canada's  Progress  in  Cooperation  and  Rural 

Credits 242 

XVIII.    Personal  and  Mortgage  Credit  for  Farmers  in 

Canada   ........  263 

XIX.    Summary  and  Conclusion 276 

Bibliography 281 

Index 289 


INTRODUCTION 

THE   RURAL   CREDIT   PROBLEM  AND   RURAL 
CREDITS  COMMISSIONS 

That  there  is  a  widespread  interest  in  the  subject  of 
rural  credits  in  the  United  States  and  in  Canada  at  the 
present  time  seems  clear.  I  have  no  doubt  but  that  this 
interest  will  continue  until  complete  systems  of  credits 
for  farmers  have  become  established  facts.  While  the 
problems  relating  to  rural  credits  are  not  new  on  this 
continent,  the  present  problems  are  quite  distinct  from 
those  of  past  decades. 

During  the  nineteenth  century  land  and  credit  problems 
held  prominent  places  in  state  and  national  programs, 
as  well  as  in  political,  economic  and  social  programs,  but 
they  were  very  different  from  the  problems  of  to-day. 
During  that  century  systems  of  surveying  and  of  dividing 
the  land  into  distinctive  units  were  established.  Systems 
of  titles,  together  with  methods  of  recording  and  register- 
ing, came  into  use  over  the  continent.  Mortgage  systems 
and  various  other  land  legislation  found  place.  National 
legislation  included  preemption,  homestead,  and  stone 
and  timber  claim  acts,  which  made  possible  the  greater 
agricultural  development  of  the  continent.  Indeed,  during 
that  century,  new  and  great  policies  of  land  tenure  and 
farm  finance  were  evolved ;  but  no  special  system,  no  defi- 

xi 


xii  Introduction 

nite  financial  institution  for  purely  agricultural  purposes, 
found  its  way  into  this  country  or  Canada. 

During  this  period  farmers  did  not  organize  for  co- 
operative credit  as  in  other  countries.  This  was  due  in 
no  small  degree  to  the  presence  of  free  land,  to  the  con- 
stant onward  movement  to  the  frontier,  to  the  instability 
of  farm-land  values,  to  the  presence  of  general  financial 
institutions  which  seemed  to  serve  the  farmers  reasonably 
well  at  the  time,  to  the  fact  that  farmers  were  untrained 
and  unwilling  to  try  to  organize  in  this  difficult  field, 
particularly  because  they  were  busily  engaged  in  opening 
up  a  new  country,  and,  finally,  to  the  fact  that,  in  the 
agricultural  system  which  was  being  built  up,  farmers 
were  being  trained  to  be  much  more  individualistic  than 
was  commonly  found  to  be  the  case  in  European  and  other 
civilized  countries. 

Land  values  were  very  unstable  during  these  formative 
days  of  agriculture  in  this  country.  This  was  before  the 
advent  of  complete  transportation  systems  equipped  to 
carry  the  various  products  of  American  farms  or  before 
the  perfection  of  systems  of  communication  to  make  known 
the  location  and  quantity  of  farm  products  to  meet  the 
requirements  of  supply  and  demand.  This  was  before 
the  days  of  exchanges  which  were  established  to  aid  in  the 
equalizing  of  values  of  farm  products,  before  the  days 
of  cold  storage  and  refrigeration,  or  before  adequate  data 
as  to  rainfall,  temperature,  and  so  on,  were  available  as 
a  basis  for  intelligent  agricultural  planning.  This  was 
while  farm  machinery  and  the  methods  of  conducting 
agricultural  operations  were  constantly  changing,  while 
the  great  ranges  of  the  West  were  the  bases  of  our  live- 


Introduction  xiii 

stock  industry,  and  while  our  grain,  cotton  and  fruit 
producing  centers  were  rapidly  shifting  from  the  East  to 
the  West.  During  this  formative  period  of  agriculture, 
farmers  were  poorly  educated  and  rural  credit  sys- 
tems, such  as  had  been  developing  rapidly  in  many 
other  civilized  countries,  found  small  place  in  this 
country. 

But,  during  the  last  part  of  the  nineteenth  century 
and  the  first  decade  of  this  century,  the  need  of  an  efficient 
system  of  financing  agriculture  began  to  show  itself  more 
and  more  plainly.    Individuals  here  and  there  talked  of 
the  needs  and  suggested  solutions.    Deeds,  contracts  for 
deeds,  abstracts,  mortgages,   deeds  of  trust,   and  other 
instruments  had  taken  definite  and  more  or  less  final  form. 
Systems  of  recording  or  registering  these  instruments  and 
of  insuring  titles  were  rapidly  being  perfected.     Shifts, 
readjustments  and  changes  grew  less  and  less  pronounced; 
stability  became  more  and  more  the  order  of  the  day. 
Land  values  commenced  to  be  something  definite.    Farm- 
ers became  better  and  better  educated.    Free  land  largely 
disappeared.    A  falling  off  in  the  exports  of  agricultural 
products   and  their   increased    and    more  stable  values 
showed  a   growing   need   for   improved  credit   facilities 
to  further  well-planned  irrigation  or  drainage  programs 
in  some  sections,  systems  of  clearing  and  improving  land, 
more  definite  systems  of  road  construction,  proper  build- 
ing programs,  and  better  and  more  equipments  on  farms. 
By  1910  improved  rural  credit  systems  were  demanded 
more  and  more  all  over  America  and  were  discussed  more 
and  more  by  fanners,  students  and  financial  and  com- 
mercial agencies.     Political  parties,  also,  seeing  the  need 


xiv  Introduction 

and  also  the  opportunity,  commenced  to  promise  legisla- 
tion of  one  kind  or  another. 

At  first  the  needs  were  little  understood  and  poorly 
analyzed.  No  attempt  was  made  to  separate  the  needs 
of  farm  owners  from  those  of  farm  tenants,  or  the  needs 
of  farm  tenants  from  those  of  hired  laborers  on  farms. 
Because  "Uncle  Sam  had  land  enough  to  give  us  all  a 
farm"  during  the  nineteenth  century,  many  assumed 
that  there  should  be  no  permanent  tenants  and  that  hired 
farm  laborers  must  be  practically  all  members  of  the 
families  of  farmers.  Now,  however,  we  know  that  farm- 
ers in  this  country  spend  considerably  more  than  six 
hundred  million  dollars  a  year  for  hired  labor,  which  is 
a  fund  nearly  if  not  quite  large  enough  to  engage  as  many 
as  two  or  two  and  a  half  million  hired  laborers  continu- 
ously. Notwithstanding  the  free  land  on  the  frontier,  we 
now  find  that  two  and  a  third  million  farms  are  operated 
by  tenant  families.  We  also  know  that  the  needs  of  the 
four  million  farmers  who  live  upon  their  own  farms  vary 
greatly  with  the  conditions  which  prevail  in  different  sec- 
tions of  the  country.  The  above  facts  relate  to  the  United 
States  alone.  The  complex  problems  of  Canada  add  to 
the  number  and  complexity  of  the  important  problems 
to  be  solved  on  the  American  continent. 

In  view  of  the  new  manifestations  and  complexities  of 
the  problem,  the  few  students  of  this  country  who  had 
seriously  contemplated  them  were  much  at  a  loss  to  know 
how  to  proceed.  The  securing  of  information  and  placing 
it  before  the  public  seemed  to  be  the  first  prerequisite  of 
intelligent  legislative  action  in  behalf  of  credit  for  farmers. 
Two  quite  independent  phases  of  the  subject  faced  the 


Introduction  xv 

investigators,  namely,  the  personal  or  short-term  credit 
and  the  land  mortgage  or  long-term  credit  which  differed 
so  radically  from  each  other. 

About  1910,  when  the  whole  subject  of  rural  credits 
commenced  to  come  into  great  prominence  in  this  country, 
those  most  deeply  interested  naturally  turned  to  Europe 
for  information.  It  was  deemed  desirable  to  investigate 
the  methods  of  financing  farmers  in  the  various  countries 
where  the  greatest  progress  had  been  made.  The  Depart- 
ment of  State  at  Washington  and  the  American  Bankers' 
Association  made  careful  studies  and  published  consider- 
able data  on  the  subject.  The  permanent  American  dele- 
gate at  the  International  Institute  of  Agriculture  at  Rome, 
Italy,  added  many  valuable  reports. 

By  this  time  reliable  information  in  great  detail  and  from 
first-hand  sources  by  personal  study  in  Europe  was  be- 
lieved to  be  the  thing  needed  if  the  work  of  establishing 
satisfactory  rural  credit  systems  for  American  farmers 
was  to  be  successfully  carried  out.  The  Southern  Com- 
mercial Congress,  an  organization  interested  in  the  de- 
velopment of  agriculture  and  other  industries  in  the 
South,  sought  to  bring  together  a  commission  composed 
of  two  representatives  from  each  state  in  the  Union,  as 
well  as  two  from  each  province  of  Canada.  The  object 
of  the  commission  was  to  study  personally  in  the  various 
European  countries  all  phases  of  agricultural  cooperation 
as  well  as  all  phases  of  rural  credits.  In  order  that  rapid 
progress  might  be  made,  a  very  large  body  of  delegates 
was  contemplated  in  order  that  subcommittees  might 
make  studies  in  separate  countries  and  report  at  stated 
times  to  the  whole  commission.    Though  this  representa- 


xvi  Introduction 

tive  body  was  not  as  large  as  originally  contemplated, 
since  all  the  states  and  provinces  were  not  represented, 
there  were  delegates  from  all  sections  of  the  United  States 
and  Canada.  This  commission  was  brought  together 
in  the  spring  of  1913  and  was  duly  organized  as  the  Ameri- 
can Commission. 

In  the  meantime,  so  great  had  become  the  national 
interest  in  the  subject,  that  Congress  voted  to  send  a 
representative  body  to  cooperate  with  the  American  Com- 
mission in  this  work  of  studying  rural  credit  systems 
abroad.  Under  authority  conferred  by  Congress,  Presi- 
dent Woodrow  Wilson  appointed  the  United  States  Com- 
mission on  Rural  Credits,  with  a  membership  of  seven. 
The  double  honor  was  conferred  on  the  writer  of  this 
introduction  of  being  appointed  a  member  of  the  United 
States  Commission  and  of  being  elected  as  its  secretary. 
As  a  member  of  the  American  Commission,  he  also  served 
as  secretary  of  the  committee  charged  with  the  preparation 
of  its  final  report.  The  two  commissions  spent  many 
months  visiting  European  countries,  gathering  informa- 
tion, and  preparing  reports  for  the  information  and  as- 
sistance of  those  in  the  United  States  who  would  be 
charged  with  the  responsibility  of  state  and  national 
legislation.  During  the  same  time  they  carried  on  a 
public  campaign  of  education,  trying  in  this  way  to 
prepare  the  country  to  pass  intelligent  judgment  on  the 
subject. 

Two  methods  of  procedure  were  followed  by  the  com- 
missions: (1)  To  secure  reliable  and  authoritative  state- 
ments from  qualified  persons  in  each  European  country 
visited  on  all  aspects  of  agricultural   cooperation  and 


Introduction  xvii 

rural  credits;  and  (2)  to  supplement  this  information  with 
personal  study  and  investigation. 

The  first  method  was  accomplished  by  official  sanction. 
The  organization  of  the  commissions  had  been  heralded 
abroad,  months  before  their  departure  from  the  United 
States,  to  the  different  European  countries  by  means  of 
their  delegates  to  the  International  Institute  of  Agricul- 
ture at  Rome,  Italy,  and  as  a  result  the  desired  information 
was  prepared  in  the  various  countries  visited  by  officers 
of  farmers'  associations,  by  governmental  specialists,  and 
by  rural  economists. 

All  the  information  secured  was  carefully  and  critically 
studied,  translations  were  made  where  necessary,  and 
these  authoritative  papers  and  documents,  together  with 
the  results  of  personal  study  and  investigation,  were  pub- 
lished in  a  volume  of  some  nine  hundred  large  pages  as 
Senate  Document  No.  214,  Sixty-third  Congress,  First 
Session. 

This  immense  volume,  crammed  full  of  authoritative 
papers  and  documents,  is  beyond  the  reach  of  the  average 
citizen  because  of  its  limited  issue.  In  order  that  the 
principal  results  might  become  available,  suggestion  was 
made  that  this  report  should  be  abstracted  and  a  popular 
edition  containing  all  fundamentals  be  sent  broadcast 
over  the  country.  There  seemed  to  be  no  practicable  way 
of  doing  this  as  a  public  document,  so  the  writer  of  this 
introduction  suggested  to  J.  B.  Morman  the  prepara- 
tion of  a  volume  for  American  readers  on  European  rural 
credit  systems  and  their  lessons.  It  was  suggested  that 
the  material  found  in  Senate  Document  214  and  other 
papers  might  be  abstracted  and  popularized,  and  that  this 


xviii  Introduction 

might  be  used  as  a  basis  for  the  volume  suggested.    The 
task  was  readily  undertaken  and  is  herewith  presented. 

I  have  gone  over  the  first  part  of  this  little  volume,  the 
subject-matter  of  which  I  was  more  or  less  familiar  with 
from  years  of  study  in  this  country  and  abroad  and  be- 
cause of  my  connection  with  the  United  States  and  Ameri- 
can Commissions.  The  lessons  from  this  study  on  Eu- 
ropean rural  credits  drawn  by  the  author  is  an  attempt 
to  adapt  those  methods  to  prevailing  rural  conditions  in 
the  United  States.  With  what  success  this  has  been  ac- 
complished must  be  left  to  the  judgment  of  our  farmers, 
the  general  public,  and  our  state  and  national  legislators. 
A  large  number  of  bills  suggesting  national  legislation 
are  before  Congress  as  I  write,  and  many  more  bills  are 
before  various  state  legislatures. 

My  files  are  heavy  with  correspondence  on  this  matter 
of  rural  credits,  and  as  I  have  gone  over  the  subject  my- 
self and  have  realized  the  many  difficulties  which  beset 
the  student  of  the  problem  of  efficiently  financing  the 
farmers  of  the  United  States  and  Canada,  I  feel  that  the 
views  which  the  author  of  this  volume  has  presented  are 
deserving  at  least  of  serious  consideration  by  those  who 
have  the  welfare  of  the  farmer  at  heart. 

John  Lee  Coulter. 

Nashville,  Tenn. 
January  15,  1915. 


PRINCIPLES  OF  RURAL  CREDITS 

PART  I 

THE  METHODS   OF  FINANCING  FARMERS   IN 
EUROPEAN   COUNTRIES 


CHAPTER  I 

PERSONAL    CREDIT    FOR    THE    LANDOWNING 

FARMER 

Germany  is  the  birth-place  of  personal  or  short-time 
rural  credit  in  Europe.  The  system  was  developed  under 
conditions  altogether  different  from  those  which  prevail 
in  America,  and  these  conditions  may  be  taken  as  largely 
typical  of  those  in  many  other  European  countries.  In 
order  to  learn  how  the  farmers  have  succeeded  so  well  in 
financing  themselves,  it  will  be  necessary  to  survey  briefly 
rural  conditions  as  they  exist  there.  Only  in  this  way  will 
it  be  possible  to  see  to  what  extent  the  European  personal 
credit  systems  among  farmers  are  adapted  to  the  needs 
and  conditions  of  our  own  country. 

FARM  HOLDINGS 

The  agricultural  population  in  Germany  consists  prin- 
cipally of  small  farm  owners.  A  man  is  called  a  farmer 
whose  land  may  be  so  small  that  he  and  his  family  have 
to  work  on  larger  farms  in  order  to  make  a  living.  Of  this 
kind  of  rural  holdings  there  are  1,262,230  which  are  smaller 
than  a  half-acre  in  size. 

But  the  German  owns  his  land  which  he  tills  when  he  is 
not  employed  as  a  farm  laborer  on  a  larger  farm.  He, 
therefore,  is  possessed  of  certain  property  rights  which 

3 


4  Principles  of  Rural  Credits 

give  him  a  settled  abode  and  an  interest  in  the  land  itself 
which  he  cultivates.  Though  he  and  his  family  may  go 
out  to  do  day  labor  on  another's  farm,  he  is  still  a  land- 
owner and  is  classed  as  a  farmer.  The  number  and  size 
of  farm  holdings  in  Germany  in  1913  were  as  follows: 

Size  Number 

Under  Y2  acre 1,262,230 

From  Y2  acre  to  5  acres 2,116,279 

From  5  to  12^  acres 1,006,277 

From  12H  to  50  acres 1,065,539 

From  50  to  250  acres 262,191 

From  250  to  2,500  acres 23,197 

Larger  than  2,500  acres 369 

Total  holdings 5,736,082 

Thus,  of  the  total  of  5,736,082  farm  holdings,  no  less 
than  4,384,786  are  under  12^  acres  in  size,  5,450,325 
farms  do  not  exceed  50  acres,  and  only  285,757  farms 
range  from  50  to  more  than  2,500  acres  in  size. 

What  is  true  of  Germany  as  to  the  size  and  number  of 
farms  is  practically  true  of  all  other  European  countries. 
In  Belgium,  for  example,  the  farm  lands  are  even  more 
subdivided  than  in  Germany,  except  those  under  2)4, 
acres  in  size.  For  the  year  1909,  the  farm  properties  of  2% 
acres  and  more  in  size  were  classified  according  to  their 
acreage  in  the  order  indicated  in  the  following  table: 

Size  Number 

Below  2lA  acres 10,736 

From  2  J^  to  5  acres 90,431 

From  5  to  1Y2  acres 51,535 


Personal  Credit  5 

Size  Number 

From  1Y2  to  10  acres 32,270 

From  10  to  12^  acres 21,677 

From  12H  to  17>6  acres 28,486 

From  ny2  to  25  acres 24,147 

From  25  to  37^  acres 18,877 

From  Z1Y2  to  50  acres 8,217 

From  50  to  75  acres 6,960 

From  75  to  100  acres 2,727 

From  100  to  125  acres 1,330 

From  125  to  250  acres 2,300 

From  250  to  375  acres 423 

Above  375  acres 102 

Total  holdings 300,218 

This  table  shows  the  extreme  division  of  cultivated 
land  in  Belgium.  This  division  becomes  even  more  re- 
markable when  we  consider  some  provinces  individually. 
In  Eastern  Flanders,  for  example,  more  than  40  per  cent 
of  the  cultivated  area  is  occupied  by  farms  of  less  than 
\2}/2  acres. 

It  is  evident,  therefore,  that  the  larger  number  of  farms 
in  European  countries  are  small  as  compared  with  the 
average  American  farm  of  138  acres,  so  that  the  farming 
population  are  brought  much  closer  together  than  in  this 
country.  Moreover,  the  population  of  Europe  as  a  whole 
is  much  more  dense  than  it  is  in  the  United  States.  Ger- 
many, for  example,  which  is  about  one-third  larger  than 
the  State  of  California,  has  a  population  of  more  than 
66,000,000  which  increases  at  about  1,000,000  inhabitants 
a  year.  The  population  of  Germany  numbers  about  320 
to  the  square  mile,  while  in  the  United  States  it  is  31  to 
the  square  mile. 


6  Principles  of  Rural  Credits 

COMMUNITY  FARM   LIFE 

On  account  of  the  small  size  of  farms  and  the  density 
of  the  population,  there  has  grown  up  in  European  coun- 
tries a  peculiar  rural  community  life.  The  farmers  almost 
wholly  dwell  in  villages,  some  of  them  containing  thou- 
sands of  inhabitants,  from  which  they  depart  in  the 
morning  to  work  on  their  separate  farms  and  return  at 
evening.  Some  of  these  farm  centers  are  as  large  as  cities. 
In  Sicily  there  are  places  with  a  population  of  about 
40,000  consisting  almost  entirely  of  men  who  work  on 
farms  as  laborers.  This  type  of  community  farm  life, 
therefore,  is  in  marked  contrast  with  the  isolated  farm 
life  in  the  United  States  and  Canada. 

After  the  evening  meal  there  is  abundant  opportunity 
for  sociability  and  good  fellowship  in  the  public  house  or 
in  the  village  hall.  The  farmers  are  all  of  the  same  race, 
speaking  the  same  language  and  having  the  same  traits 
and  customs.  They  know  one  another  in  every  district; 
they  know  each  other's  traits  of  character  and  habits  of 
work;  they  are  bound  together  by  the  common  ties  of 
blood,  of  labor,  and  of  community  life. 

The  conditions  of  European  farm  life  are  especially 
adapted  to  local  organizations  along  the  lines  of  cooper- 
ative purchase  of  supplies,  sale  of  produce,  insurance  and 
finance.  The  small  size  of  farms  often  renders  the  need 
of  organization  imperative  in  order  that  the  individual 
farmer  may  save  himself  from  exploitation.  Under  the 
best  of  circumstances,  the  average  small  farmer  has  no 
easy  task  to  meet  the  ordinary  economic  needs  of  life. 
To  accomplish  this  very  often  means  long  hours  of  labor 


Personal  Credit  7 

in  the  field  for  even*  member  of  the  family.  To  maintain 
an  efficient  and  proper  standard  of  life,  it  is  essential  for 
the  small  farmer  to  be  protected,  or  to  protect  himself,  not 
only  against  losses  which  may  come  because  of  the  nature 
of  farming,  but  also  from  all  those  who  would  prey  upon 
his  industry.  He  must  buy  his  supplies  as  cheaply  as 
possible  and  sell  his  products  to  the  best  advantage.  If 
he  must  borrow  money  to  enlarge  his  field  of  labor  with 
a  view  of  increasing  his  net  income,  it  is  important  that 
he  secure  the  loan  at  as  low  a  rate  of  interest  as  possible. 
If  there  is  any  risk  of  loss  in  his  enlarged  industry,  such  as 
in  the  raising  or  fattening  of  cattle  for  market,  he  realizes 
the  advantage  of  being  insured.  The  need  and  power  of 
organization  would  readily  be  felt  by  communities  of 
small  farmers  and  their  conditions  of  life  especially  fit 
them  for  cooperative  organization. 

THE    RISE    OF    COOPERATIVE    RURAL    CREDIT 

Where  a  system  of  small  farms  prevails,  the  owners  are 
liable  to  fall  into  the  hands  of  usurers  sooner  or  later.  This 
is  due  to  the  risks  attending  their  business  and  to  the  ir- 
regularity of  money  income  from  the  sale  of  farm  produce 
from  year  to  year. 

The  small  farmer  is  not  usually  possessed  of  ready  money. 
The  returns  from  farming  are  very  uncertain  owing  to  the 
perils  of  harvesting,  the  prevalence  of  plant  diseases,  the 
extreme  perishability  of  many  forms  of  produce  such  as 
small  fruits,  dairy  produce,  poultry,  eggs,  and  the  like, 
and  many  other  reasons.  Certain  supplies  he  must  have, 
such  as  seed,  fertilizers,  feeding  stuffs,  and  implements, 
in  order  to  carry  on  his  industry.    If  he  has  not  the  money 


8  Principles  of  Rural  Credits 

nor  the  materials  to  conduct  farming,  he  must  borrow  the 
money,  get  store  credit,  or  go  out  of  business.  Standing 
alone  and  under  the  pressure  of  necessity,  the  small  farmer 
is  in  no  position  to  hold  out  against  high  interest  charges 
or  exorbitant  prices  for  supplies.  He  is  at  the  mercy  of 
money  lender  and  supply  dealer,  and  he  frequently  be- 
comes the  victim  of  one  or  both. 

This  was  the  case  in  Europe  less  than  a  century  ago. 
The  small  cultivator  had  been  plunged  into  a  bondage 
of  debt  by  borrowing  of  the  money  lender  at  ruinous 
rates  of  interest,  sometimes  as  high  as  100  per  cent.  From 
this  condition  there  was  no  prospect  of  his  freeing  himself 
so  long  as  he  stood  alone. 

Unfortunately,  this  was  not  his  worst  plight.  The 
storekeeper  in  the  village  or  at  the  crossroads,  who  supplied 
him  on  credit  with  seeds,  fertilizers,  household  goods, 
feeding  stuffs,  implements,  and  so  on,  was  able  to  establish 
a  more  complete  control  over  the  farmer's  business  than 
the  money  lender.  Once  well  in  debt  to  the  storekeeper, 
the  farmer  without  money  soon  becomes  his  creature  and 
not  infrequently  becomes  his  victim  also  in  due  time. 
The  farmer  must  buy  only  from  the  creditor  storekeeper 
and  must  take  without  question  the  goods  offered  him 
whatever  may  be  their  quality  or  their  price.  His  debt 
in  bad  seasons  grows  and  the  bonds  of  his  servitude  are 
drawn  tighter.  If  his  small  farm  is  worth  acquiring,  the 
owner's  liability  is  allowed  to  increase  up  to  the  point  at 
which  his  security  is  exhausted,  and  his  farm  then  passes 
into  the  hands  of  the  money  lender  or  the  storekeeper  by 
private  contract  or  by  public  sale.  If  at  any  stage  in  the 
process  of  ruin  the  farmer  ventures  to  object  to  the  high 


Personal  Credit  9 

interest  rates  or  to  the  poor  quality  and  high  price  of  his 
purchased  store  necessities,  the  threat  of  a  sheriff's  writ 
is  usually  sufficient  to  keep  him  quiet  until  his  financial 
ruin  is  complete. 

It  was  the  witnessing  of  just  such  scenes  and  the  almost 
total  paralysis  of  the  farming  industry  in  Germany  which 
gave  rise  to  the  personal  credit  plans  of  a  philanthropist 
about  the  middle  of  the  last  century. 

Frederick  William  Raiffeisen  was  born  in  1818,  in  the 
Rheinprovinz,  and  the  rural  credit  unions  he  later  formed 
are  known  as  Raiffeisen  banks.  During  the  famine  years  of 
1846  and  1847,  he  was  an  eyewitness  of  the  fearful  suffer- 
ings of  the  peasant  farmers  and  of  the  intolerable  exac- 
tions of  money  lenders.  The  distresses  of  the  poor  farmers 
appealed  to  his  sympathies  and  he  formulated  plans  to 
improve  their  condition.  He  first  gathered  sufficient 
funds  to  establish  a  cooperative  bakery  where  the 
peasants  were  enabled  to  purchase  bread  at  about  half 
the  regular  price.  Raiffeisen  next  established  a  co- 
operative cattle-purchasing  society  and  this  organiza- 
tion likewise  proved  highly  successful.  Finally,  he  es- 
tablished at  Flammersfeld  his  first  cooperative  loan  bank 
in  1849,  with  a  capital  of  $1,500.  This  bank  offered  to 
lend  money  at  a  low  rate  of  interest  to  the  farmers  who 
would  comply  with  its  rules.  Success  attended  Raiffeisen's 
efforts  at  Flammersfeld,  and  in  1854  he  established  a 
second  bank  in  the  district  of  Heddesdorf.  The  rural 
credit  movement,  thus  begun,  grew  very  slowly,  for  the 
third  bank  was  not  established  until  1862  and  the  fourth 
not  until  1882,  or  twenty  years  later. 

But  from  these  small  beginnings  the  Raiffeisen  cooper- 


10  Principles  of  Rural  Credits 

ative  rural  credit  movement  has  spread  all  over  Europe. 
In  Germany  alone  there  were  13,736  rural  credit  societies 
belonging  to  the  Imperial  Federation  at  Darmstadt  on 
January  1,  1913;  while  the  total  number  in  the  empire  is 
nearly  17,000.  The  movement  began  in  Austria  in  1886, 
and  more  than  8,000  Raiffeisen  rural  credit  unions  exist 
there  at  the  present  time.  In  Italy  there  are  more  than 
2,000  rural  credit  banks  organized  on  the  Raiffeisen  system. 
The  farmers  in  other  European  countries  have  united 
to  form  similar  societies  and  the  movement  is  rapidly 
growing. 

PRINCIPLES   OF   A   RAIFFEISEN   RURAL   BANK 

As  we  have  previously  stated,  the  European  farmers 
are  brought  closely  together  by  the  small  size  of  their 
farms  and  by  their  manner  of  living  in  villages  rather  than 
on  isolated  farms.  Such  groups  of  farmers  are  readily 
formed  into  local  credit  societies.  The  economic  condition 
of  the  farmers  is  very  similar.  They  possess  some  land  and 
chattels,  but  have  little  ready  money. 

In  the  case  of  societies  organized  on  the  Raiffeisen 
system,  the  members  are  usually  the  owners  of  small  or 
medium-size  farms  ranging  from  23^  to  40  acres.  While 
these  banks  are  strictly  rural,  persons  other  than  farmers 
living  in  the  country,  such  as  small  tradesmen,  may  be- 
come members.  This  class  of  members  helps  materially 
toward  furnishing  the  capital  to  run  the  bank  by  means 
of  their  deposits. 

At  certain  seasons  of  the  year,  especially  in  spring  and 
fall,  the  need  of  a  loan  by  these  small  farmers  is  very  press- 
ing, and  the  local  mutual  credit  banks  are  formed  for  the 


Personal  Credit  11 

purpose  of  making  such  loans.  The  loans  are  generally 
made  on  personal  security — on  one,  two,  or  three-name 
notes — for  periods  ranging  from  90  days  to  3  years  ac- 
cording to  the  object  for  which  the  loan  is  granted.  Loans 
for  shorter  periods  are  usually  granted  to  farmers  who 
want  money  only  to  enable  them  to  run  their  farms  from 
year  to  year;  while  the  loans  for  longer  periods  are  made 
to  farm  owners  who  want  to  make  permanent  improve- 
ments, such  as  putting  up  new  buildings,  for  irrigation, 
drainage,  and  the  like. 

As  a  general  financial  principle,  loans  are  not  made 
without  some  guaranty  of  repayment.  This  is  known  as 
the  security.  But  where  farmers  who  have  little  money 
form  a  local  cooperative  society  and  pool  their  credit, 
the  society  becomes  the  unit  and  not  the  individual  mem- 
bers. Hence,  the  Raiffeisen  rural  mutual  credit  banks 
are  based  upon  certain  clearly  defined  principles  which 
seem  essential  for  providing  the  security  necessary  for  the 
protection  of  loans  made  to  members.  These  principles 
are  as  follows: 

1.  The  unlimited  liability  of  all  members  for  all  in- 
debtedness of  their  particular  society. 

2.  There  are  admitted  as  members  the  residents  of  a 
single  district  only,  if  that  is  sufficiently  populated  to 
make  the  society  self-supporting.  For  this  reason,  no 
farmer  can  be  a  member  of  more  than  one  society. 

3.  No  entrance  fee  is  collected  of  members. 

4.  So  far  as  the  law  of  the  land  permits,  no  shares  of 
stock  are  issued.  But,  wherever  the  law  makes  shares 
obligatory,  a  member's  holding  is  limited  to  one  share 
which  must  be  of  small  value — from  $2  to  $10  a  share. 


12  Principles  of  Rural  Credits 

If  a  dividend  is  declared  on  such  shares,  the  dividend  must 
not  exceed  the  rate  of  interest  charged  upon  loans. 

5.  The  only  paid  officer  of  the  bank  is  the  secretary- 
treasurer.  It  is  his  duty  to  keep  the  accounts  and  handle 
the  money. 

6.  All  profit  is  carried  to  a  common  fund,  called  the  re- 
serve fund,  which  belongs  to  the  society  as  a  whole.  This 
common  fund  can  never  be  divided  among  the  members, 
not  even  if  the  society  should  be  disbanded.  If  that  take 
place,  the  reserve  fund  is  devoted  to  some  public  or  char- 
itable purpose. 

The  aim  of  the  Raiffeisen  credit  societies  is  to  improve 
both  the  material  and  moral  condition  of  their  members. 
The  credit  granted  to  members  may  be  in  the  form  of 
a  money  loan  or  in  providing  necessary  supplies  for  the 
farm,  such  as  seed,  fertilizers,  implements  or  live-stock. 
The  task  which  these  credit  societies  set  themselves  is  to 
provide  the  money  required  for  loans  and  for  the  purchase 
of  supplies  which  are  sold  on  credit  to  members.  They 
seek  to  aid  those  who  are  financially  weak  rather  than  to 
make  profits.  The  foundation  upon  which  they  rest  is 
that  of  Christianity  and  national  loyalty.  A  standing 
rule  at  society  meetings  is  that  neither  denominational 
nor  political  subjects  shall  be  discussed. 

Moreover,  these  Raiffeisen  rural  credit  societies  are 
not  allowed  to  engage  in  any  speculative  business  what- 
ever. Money  loans  and  credit  are  granted  to  members 
only  on  personal  security  and  for  objects  held  to  be  pros- 
pectively profitable. 

Adequate  security  must  be  provided  for  every  loan  or 
credit  granted.    In  the  case  of  loans,  the  time  of  repayment 


Personal  Credit  13 

is  fixed  in  advance;  though  renewals  are  allowed  up  to  a 
period  of  one  year  on  loans  for  three  months  or  six  months. 
The  length  of  time  and  the  amount  of  the  installments  for 
repayment  are  in  every  case  proportioned  to  the  object 
of  the  loan  and  the  anticipated  ability  of  the  borrower 
to  repay  within  a  given  time.  No  loan  is  granted  without 
careful  consideration  by  a  committee  of  members  of  the 
object  for  which  it  is  asked  and  of  the  likelihood  of  the 
enterprise  returning  a  profit  to  the  borrower. 

On  the  other  hand,  borrowers  are  entitled  to  repay  at 
any  time.  Thus  everything  is  done  out  of  consideration 
for  the  welfare  and  protection  of  the  debtor.  Under 
certain  contingencies  the  rural  credit  banks  reserve  to 
themselves  the  right  of  calling  in  a  loan.  But  this  right 
has  seldom  been  exercised. 

Unlimited  liability  in  Raiffeisen  societies 

The  principle  of  unlimited  liability  of  all  members  for 
all  indebtedness  of  their  society  is  based  on  the  personal 
integrity  of  the  members  as  honest  men.  In  communities 
with  narrow  limits,  the  risks  are  not  great  as  all  members 
are  personally  known  to  each  other. 

Collective  or  unlimited  liability  means,  then,  that  each 
member  is  liable  with  all  his  goods  for  a  debt  owing  to 
any  creditor  by  a  member  of  the  bank,  and  that,  if  this 
debt  is  not  paid,  it  is  divided  equally  among  all  the  mem- 
bers.   For  example: 

Suppose  a  rural  bank  with  100  members  owes  a  creditor 
the  sum  of  $1,000.  He  can  make  any  one  of  these  100 
members  pay  this  debt.  If  the  real  debtor  is  incapable  of 
paying  the  whole  amount,  the  creditor  can  compel  other 


14  Principles  of  Rural  Credits 

members  to  pay  the  balance.  By  law  each  member  can 
be  made  to  pay  his  share  of  the  debt  only;  but,  if  one  of 
the  members  finds  it  impossible  to  pay  his  share — which 
would  be  $10 — the  other  99  members  would  each  have  to 
pay  ten  cents  more. 

While  unlimited  liability,  therefore,  would  seem  to 
present  some  danger  for  the  members,  experience  in  Eu- 
rope has  demonstrated  in  an  unanswerable  way  that  there 
is  no  danger  in  undertaking  liability  with  all  one's  property 
for  the  debts  of  a  Raiffeisen  bank.  The  general  testimony 
of  bank  officials  and  economic  experts  is  that  seldom,  if 
ever,  has  a  member  lost  a  cent  by  reason  of  his  assuming 
unlimited  liability. 

The  explanation  of  this  remarkable  circumstance  is 
to  be  found  in  the  actual  organization  of  Raiffeisen  rural 
credit  banks.  First,  the  members  of  the  committee  of 
management,  as  well  as  the  council  of  supervision,  are 
chosen  from  among  the  residents  of  the  district  who  are 
the  best  off  financially.  They  feel  that  it  is  a  good  thing 
to  act  in  this  capacity  so  as  to  inspire  confidence.  The 
welfare  of  the  farmers  and  the  district  is  the  chief  con- 
sideration with  these  officials  who  receive  no  compensa- 
tion for  their  services. 

Moreover,  the  following  clauses  are  inserted  in  the 
rules  which  are  especially  designed  to  reduce  the  chances 
of  loss  to  a  minimum: 

1.  The  committee  of  management  must  pass  upon  all 
admission  and  withdrawal  of  members;  the  council  of 
supervision  has  final  control  of  all  of  these  operations. 
But  the  committee  of  management  is  generally  composed 
of  5  members  and  the  council  of  supervision  of  6  members, 


Personal  Credit  15 

and  it  is  difficult  to  believe  that  11  members,  chosen  from 
those  who  are  best  off  and  responsible  with  the  others  for 
all  their  goods,  would  rashly  engage  in  risky  speculation, 
especially  since  such  speculation  could  in  no  way  bring 
them  any  profit.  So  that,  as  they  have  everything  to 
lose  and  nothing  to  gain  by  acting  thus,  they  would  scarcely 
undertake  risky  business. 

2.  The  bank  only  lends  to  its  own  members,  and  only 
accepts  as  members  the  residents  of  the  parish  where  it  is 
established.  All  business,  therefore,  is  conducted  between 
persons  who  know  one  another  personally. 

3.  The  general  assembly,  composed  of  all  the  members, 
fixes  the  maximum  sum  to  which  debts  may  amount. 
When  this  sum  is  reached,  the  bank  accepts  no  more 
deposits.  This  assembly  also  determines  the  maximum 
sum  that  will  be  loaned  to  a  member,  which  seldom  ex- 
ceeds $400. 

4.  The  borrower  must  deserve  the  credit  which  is  granted 
to  him.  Moreover,  it  must  be  applied  in  some  productive 
undertaking  which  will  return  the  loan  with  interest  and 
a  profit  for  his  labor.  Before  receiving  the  money  he  must 
state  for  what  work  it  is  intended,  and  he  is  watched  to 
see  that  the  loan  is  applied  to  this  purpose. 

5.  Each  borrower  must  give  some  security,  either  a 
guarantor,  an  agricultural  warrant  covering  farm  produce, 
or  a  mortgage  on  his  furniture  or  land. 

6.  Every  undertaking  which  is  evidently  risky  is  for- 
bidden on  the  personal  responsibility  of  the  committee 
of  management. 

7.  The  council  of  supervision  is  obliged  every  three 
months  to  examine  all  transactions  of  the  bank  during 


16  Principles  of  Rural  Credits 

that  time.  If  in  any  case  the  probability  of  a  loss  is  fore- 
seen, the  society  reserves  the  right  to  demand  the  repay- 
ment of  the  loan  on  four  weeks'  notice. 

8.  The  annual  profits  are  placed  in  the  reserve  fund  as 
a  security  against  loss. 

With  such  strict  rules  and  such  minute  precautions, 
losses  are  hardly  possible,  so  that  there  is  only  an  imagi- 
nary danger  in  becoming  a  member  of  a  Raiffeisen  credit 
society  with  unlimited  liability. 

In  a  word,  therefore,  these  banks  merely  provide  a 
method  by  which  members  indorse  each  other's  borrow- 
ings to  the  full  extent  of  their  own  assets.  Since  the 
members  are  brought  together  from  a  restricted  area, 
the  total  population  of  which  is  seldom  less  than  400  or 
more  than  2,000,  the  expectation  is  that  notoriously  im- 
provident and  irresponsible  persons  will  not  be  admitted 
to  membership.  For  these  reasons,  therefore,  the  danger 
of  loss  through  unlimited  liability  is  reduced  to  the  mini- 
mum. 

Cooperative  supply  societies 

As  has  been  stated,  in  addition  to  supplying  members 
with  money,  many  Raiffeisen  societies  engage  in  the  col- 
lective purchase  of  farm  necessaries,  such  as  fertilizers, 
feeding  stuffs,  seeds,  implements,  and  the  like,  which  are 
sold  to  the  members  on  credit.  The  nature  of  agriculture 
as  an  industry  makes  this  form  of  credit  almost  as  valuable 
to  the  farmer  as  being  supplied  with  ready  money  or  credits 
on  current  account  at  the  rural  bank.  The  dates  of  the 
heaviest  expenses  and  returns  from  farming  hardly  ever 
coincide.    The  chief  returns  take  place  in  the  autumn  and 


Personal  Credit  17 

winter  when  the  staple  crops  are  sold.  But,  in  the  mean- 
time, expenses  of  breeding  cattle  continue,  in  the  spring 
seed  and  fertilizers  must  be  procured,  machinery  and 
implements  must  be  bought  before  the  harvest,  taxes 
fall  due  and  must  be  paid,  and  if  help  is  hired  wages  can- 
not go  unpaid.  When  it  comes  to  purchasing  necessary- 
supplies,  the  unorganized  farmer  must  either  buy  of  the 
merchant  on  credit  at  high  prices  or  fail  to  purchase  at 
all — both  very  unprofitable  courses. 

A  good  farmer  in  Europe  becomes  a  member  of  a  co- 
operative supply  society  in  order  to  secure  a  high  grade 
of  goods  on  credit  as  cheaply  as  possible  which  insures 
his  getting  all  the  profits  possible.  The  credit  societies 
are  not  only  banks  to  lend  money,  but  are  also  savings 
banks.  They  take  charge  of  the  surplus  cash  of  rural 
communities  in  order  to  invest  it  in  such  a  way  that  it 
shall  benefit  agriculture.  This  is  mainly  done  by  means 
of  cooperative  supply  societies. 

After  the  rural  banks,  the  supply  societies  are  the  most 
important  personal-credit  institutions  for  farmers  in 
Europe.  These  societies  confine  themselves  almost  ex- 
clusively to  supplying  their  members  with  fertilizers, 
feeding  stuffs,  seeds,  farm  implements  and  machinery, 
coal,  and  other  miscellaneous  articles.  Through  coopera- 
tion in  this  direction,  considerable  benefit  has  accrued  to 
farmers.  The  guaranty  of  good  quality  is  assured,  the 
prices  are  much  lower  than  if  bought  in  small  quantities 
of  merchants,  and  the  members  are  frequently  granted 
necessary  requisites  on  credit.  Moreover,  the  supply 
societies  exercise  a  considerable  educational  influence. 
They  have  promoted  among  farmers  information  on  the 


18  Principles  of  Rural  Credits 

use  of  suitable  fertilizers,  seeds,  feeding  stuffs,  imple- 
ments, and  so  on.  The  habit  of  inquiring  about  the  quality 
of  goods  is  fostered  and  the  necessity  of  quality  is  brought 
home  to  their  minds.  The  widespread  practice  of  requiring 
orders  in  advance,  together  with  the  insistence  upon  cash 
or  short-time  payments,  exercises  an  influence  in  the  direc- 
tion of  improving  business  habits  among  the  rural  popu- 
lation. 


CHAPTER  II 

PERSONAL  CREDIT  FOR  THE  LANDOWNING 
FARMER— THE  RURAL  BANKS  IN  PARTIC- 
ULAR 

Having  traversed  the  subject  of  financing  the  landed 
farmer  in  a  general  way,  we  may  now  consider  more  in 
detail  some  of  the  principles  and  practices  involved  in 
the  actual  working  of  rural  banks. 

RURAL   BANKING   AND    BANK   BUILDINGS 

The  development  of  rural  banks  and  banking  varies 
with  the  economic  condition  of  the  population,  the  number 
of  members  who  belong  to  a  local  credit  society,  the  rel- 
ative size  of  farms,  and  the  financial  requirements  of 
farmers  for  conducting  their  business.  Not  every  local 
rural  credit  society  is  able  to  run  a  bank  in  a  strict  sense 
of  the  term.  Some  of  the  arrangements  for  making  loans 
to  members  and  for  managing  the  society's  business  are 
of  the  simplest  kind. 

The  evolution  of  banking  practices  and  of  bank  buildings 
follows  closely  the  educational  development  of  the  rural 
population.  In  certain  instances  the  credit  society  has 
such  a  small  membership  and  the  economic  and  financial 
status  of  its  members  is  so  poor  that  the  officers  all  serve 
gratuitously.  While  the  farmers  are  poor,  the  community 
spirit  is  rich.    The  aim  is  to  help  one  another. 

19 


20  Principles  of  Rural  Credits 

The  so-called  "rural  bank"  may  have  no  building,  nor 
even  a  rented  room,  in  which  to  conduct  a  loan  business 
with  its  members.  The  cashier  may  be  allowed  house- 
rent  free,  with  a  small  salary  of  a  few  dollars  a  year  in 
payment  for  his  services  as  secretary,  clerk  and  cashier  in 
one  and  for  the  use  of  a  room  in  the  house  for  conducting 
the  society's  savings  and  loan  business.  Also,  a  single 
room  in  a  member's  house  may  serve  as  the  simplest 
kind  of  cooperative  store  and  for  carrying  on  the  most 
primitive  kind  of  money  lending.  The  sums  deposited 
by  members,  on  which  interest  of  2  or  3  per  cent  is  paid, 
may  be  as  low  as  ten  cents  and  seldom  exceed  a  few 
dollars.  The  sums  loaned  to  farmers  in  poor  districts 
may  be  as  low  as  five  dollars  and  not  often  greater  than 
twenty-five  dollars.  But  all  these  transactions  are  con- 
ducted on  strict  business  principles,  so  that  the  poorest 
farmers  are  thereby  given  their  first  lessons  in  banking 
practices.  This  is  a  very  valuable  educational  feature 
of  the  crudest  forms  of  local  rural  credit  banks  in  Euro- 
pean countries. 

In  more  densely  populated  districts,  where  the  credit 
societies  have  a  much  larger  and  more  prosperous  member- 
ship, the  bank  proper  may  consist  of  a  rented  room  in  the 
local  town  hall  or  an  ordinary  store.  In  such  cases  the 
furniture  usually  consists  of  a  large  table  for  the  use  of 
the  directors,  ten  or  a  dozen  chairs,  a  desk  of  some  kind 
for  notes,  stationery,  books,  and  similar  property.  Local 
credit  banks  may  or  may  not  own  a  safe,  depending  upon 
the  amount  of  the  notes  they  carry  and  the  amount  of 
their  cash  deposits.  The  notes  and  funds  may  be  kept  in 
a  wallet  by  the  treasurer  or  president  of  the  society.    The 


Personal  Credit  21 

whole  banking  system  in  such  communities  is  based  upon 
mutual  help  and  confidence  in  each  other's  honesty. 

The  most  prosperous  rural  banks  and  cooperative  supply 
societies  own  their  own  buildings  and  fixtures.  Loans 
to  farmers  are  made  in  larger  sums  and  the  extent  of  busi- 
ness conducted  requires  a  staff  of  bank  officials  and  clerks 
and  of  store  employees.  The  expenses  are  met  from  the 
profits  of  the  business,  though  every  effort  is  made  to 
reduce  the  cost  of  running  the  bank  or  store  to  the  mini- 
mum possible  consistent  with  efficiency  in  behalf  of  the 
patrons.  If  any  profits  remain  after  all  expenses  have  been 
paid,  they  are  usually  added  to  a  reserve  fund  which  be- 
longs to  the  local  rural  bank  or  cooperative  supply  society 
as  a  whole. 

CENTRAL  RURAL   BANKS 

But  neither  the  local  rural  credit  banks  nor  supply 
societies  would  be  able  to  satisfy  fully  the  requirements 
of  their  members,  if  they  had  to  depend  on  local  means 
alone.  Both  kinds  of  institution  can  fulfill  their  purposes 
best  by  affiliating  with  a  central  organization  which  is 
able  to  assume  and  maintain  its  position  among  financial 
institutions  by  means  of  its  larger  capital  and  expert 
business  management.  Therefore,  it  has  always  been 
one  of  the  chief  objects  of  the  Raiffeisen  system  to  estab- 
lish central  societies  for  lending  money  and  supplying 
goods. 

The  connection  with  the  central  society  is  especially 
necessary  for  the  rural  credit  banks,  because  it  frequently 
happens,  especially  at  first,  that  their  capital  is  not  suffi- 
cient to  meet  the  credit  and  cash  requirements  of  their 


22  Principles  of  Rural  Credits 

members.  The  local  rural  banks,  therefore,  are  often 
obliged  to  borrow  money.  This  they  can  best  do  from  a 
central  cooperative  bank,  which,  in  its  position  as  a  whole- 
sale banking  house,  is  able  to  take  advantage  of  the  most 
favorable  periods  on  the  money  market. 

Historically  considered,  the  particular  point  to  which 
greatest  importance  was  attached  in  fixing  a  sphere  for 
the  operations  of  a  rural  bank  being  that  of  the  smallness 
of  the  district,  the  necessity  of  providing  for  collective 
action  and  a  means  of  insuring  that  there  should  be  money 
on  hand  when  needed  very  soon  became  manifest.  Ac- 
cordingly, after  various  unsuccessful  attempts,  Raiffeisen 
formed  the  Rhenish  Agricultural  Cooperative  Bank  at 
Neuwied  in  1872.  Similar  banks  were  also  established 
in  Hesse  and  Westphalia.  In  1874  Raiffeisen  formed, 
in  connection  with  the  Mutual  Life  Insurance  Company 
of  Arminia,  the  German  Agricultural  General  Bank  as 
the  apex  to  the  three  cooperative  rural  banks.  On  ac- 
count of  unforeseen  difficulties,  this  organization  proved 
unworkable.  Finally,  in  1876,  Raiffeisen  proceeded  to 
establish  as  a  joint-stock  company  the  Agricultural  Cen- 
tral Loan  Bank  for  Germany  with  headquarters  at  Neu- 
wied. That  institution  exists  to-day,  but  its  headquarters 
were  removed  to  Berlin  in  1909.  The  management  and 
objects  of  this  bank  may  be  taken  as  typical  of  the  opera- 
tion of  central  rural  banks  in  the  different  countries  of 
Europe. 

The  Agricultural  Central  Loan  Bank  does  business 
with  about  5,000  local  rural  banks.  This  business  is  con- 
ducted by  means  of  branch  banks  which  have  been  es- 
tablished in  almost  every  province  and  located  in  some 


Personal  Credit  23 

principal  city.  This  was  done  in  order  to  facilitate  the 
business  conducted  between  the  central  bank  and  the 
local  rural  banks  and  to  keep  in  closer  touch  with  their 
operations  and  needs. 

The  central  bank  acts  as  a  medium  between  the  dif- 
ferent local  banks  in  transferring  unused  funds  from  places 
where  there  is  a  surplus  to  localities  where  the  demand 
for  money  is  greater  than  the  supply.  Also,  when  local 
banks  need  greater  assistance  than  their  combined  re- 
sources can  meet,  the  central  bank  is  in  a  position  to  bor- 
row money  from  outside  sources.  About  S5,000,000  has 
been  borrowed  in  this  way  and  reloaned  to  the  local  banks. 

The  central  bank  exercises  supervisory  authority  over 
the  rural  banks  and  refuses  those  credit  which  do  not 
conform  to  established  rules  for  the  safe  and  careful  con- 
duct of  business.  The  limit  of  credit  usually  granted  is 
10  per  cent  of  the  combined  assessed  valuation  of  the 
property  of  the  members  of  any  particular  local  bank. 

The  central  bank  is  owned  by  the  local  banks,  since 
each  one  owns  from  one  to  five  shares  of  stock  at  $200  a 
share.    The  central  bank  is  thus  made  a  joint-stock  bank. 

For  borrowed  money  the  central  bank  has  to  pay  not 
less  than  43^  per  cent  interest,  and  it  charges  the  local 
banks  three-fourths  of  1  per  cent  higher  rate  of  interest 
than  it  is  required  to  pay.  In  addition,  a  charge  of  one- 
tenth  of  1  per  cent  of  the  total  loans  to  each  local  bank 
made  during  the  year  is  exacted  at  the  end  of  each  year. 
These  charges  defray  all  expenses  of  operating  the  central 
bank  and  provide  for  a  reserve  fund  and  a  reasonable 
dividend. 

An  inspector  is  employed  by  the  central  bank  and  kept 


24  Principles  of  Rural  Credits 

in  the  field  to  examine  into  the  condition  of  the  local  banks. 
This  examiner  is  under  bond  and,  in  case  of  loss  on  the 
part  of  any  local  bank  because  of  his  failure  to  do  his  duty, 
his  bondsman  is  required  to  make  good  the  loss. 

More  specifically,  the  objects  and  transactions  of  the 
central  bank  are  as  follows: 

The  Agricultural  Central  Loan  Bank  for  Germany  aims 

(1)  To  carry  on  banking  and  credit  business,  more  partic- 
ularly as  a  means  of  equalizing  temporary  shortness  or 
oversupply  of  money  in  local  banks;  (2)  to  provide  for 
the  collective  purchase  of  farm  requirements.  The  latter 
is  performed  through  seven  distinct  organizations,  each 
operating  within  its  own  particular  district. 

The  share  capital  raised  for  the  bank's  purposes  at  the 
time  of  its  formation  was  more  than  $60,000;  in  1913 
it  was  $2,500,000.  The  shares  are  for  $200  each  and  are 
made  out  to  the  holder  by  name.  They  are  accordingly 
not  purchasable  on  the  market.  Shares,  however,  may  be 
transferred  with  the  approval  of  the  council  of  supervision 
of  the  bank. 

The  power  to  acquire  shares  is  limited  (1)  To  individual 
members  of  the  bank's  committee  of  management  and 
council  of  supervision;  and  (2)  to  local  credit  societies 
which  adopt  in  their  rules  and  regulations  the  Raiffeisen 
principles,  and  which  conduct  business  and  keep  their 
books  in  accordance  with  the  rules  and  regulations  of  the 
General  Union  of  Rural  Cooperative  Societies  for  Ger- 
many. 

The  funds  required  for  the  business  of  the  bank  are 
provided  in  the  following  ways:  (1)  By  the  issue  of  shares; 

(2)  by  deposits  received  and  loans  secured ;  (3)  by  commis- 


Personal  Credit  25 

sions  charged  and  a  margin  of  profit  on  business  transacted; 
(4)  by  profits  on  the  dealing  in  farm  requisites;  and  (5)  by 
the  issue  of  debentures  running  for  indefinite  periods. 

The  funds  so  raised  are  applied  in  the  following  ways: 
(1)  In  credits  given  in  current  account  to  local  rural  banks, 
cooperative  societies,  central  banks  formed  for  particular 
countries  or  provinces,  and  central  business  organizations 
for  cooperative  societies;  (2)  for  carrying  on  the  business 
in  dealing  in  farm  requisites;  (3)  for  discounting  ac- 
ceptances and  making  advances  on  approved  securities 
in  conformity  with  the  practice  of  the  Imperial  Bank; 
and  (4)  for  any  other  purpose  in  harmony  with  the 
general  objects  of  the  bank. 

The  net  profits  realized  are  applied  (1)  To  the  accumu- 
lation of  a  reserve  fund ;  and  (2)  to  the  payment  of  dividends 
on  shares,  which  must  never  exceed  4  per  cent  a  year. 

Business  with  local  rural  banks  and  cooperative  societies 
is  carried  on  through  the  medium  of  the  bank's  branch 
offices,  of  which  there  are  12  situated  in  the  largest  cities 
of  Germany. 

To  permit  of  the  fixing  of  the  credit  limit  of  local  so- 
cieties, they  have  to  submit  proof  of  their  possession  of 
property,  giving  the  following  particulars:  (1)  In  countries 
in  which  a  property  tax  is  levied,  a  list  of  their  members 
showing  the  total  amount  of  property  tax  to  which  they 
are  assessed;  (2)  in  other  countries  a  list  of  members  and 
estimates  made  by  the  committee  of  management  and 
the  council  of  supervision  of  each  society  as  to  the  amount 
of  property  possessed  by  each  member. 

The  maximum  credit  limit  for  each  local  bank  is  fixed 
by  the  committee  of  management  of  the  central  bank;  in 


26  Principles  of  Rural  Credits 

exceptional  cases  it  is  fixed  by  the  council  of  supervision. 
Generally  speaking  the  limit  is  this:  (1)  In  societies  re- 
turning assessments  for  property  tax,  10  per  cent  of  the 
value  so  returned;  and  (2)  in  societies  in  those  parts  of 
the  country  where  there  is  no  property  tax,  5  per  cent 
of  the  valuation  of  property  determined  by  the  committee 
of  management  of  the  local  bank.  No  society  is  entitled 
to  claim  a  credit  as  a  matter  of  right;  and  the  central 
bank  also  reserves  to  itself  the  right  to  call  in  a  credit 
that  has  been  granted  at  any  time. 

The  data  required  to  establish  a  maximum  limit  of 
credit  must  be  submitted  to  the  central  bank  once  in  every 
three  years.  In  special  cases,  they  must  be  submitted 
at  any  time  on  demand. 

The  business  transactions  as  between  the  central  bank 
and  its  branch  offices  are  as  follows:  Should  the  funds 
collected  by  a  branch  office  in  its  locality  prove  insufficient 
for  its  daily  requirements,  it  has  to  apply  to  the  central 
bank  for  the  balance  needed.  Such  amount  is  furnished 
either  in  cash  out  of  the  balance  on  hand,  or  else  by  a 
draft  on  the  Imperial  Bank  of  Germany.  Surplus  funds 
held  by  branch  offices  are  in  like  manner  paid  into  the 
central  bank.  Each  branch  office  is  required  to  send  in  to 
the  central  bank  every  week  a  statement  of  its  transactions 
and  cash  holdings,  and  every  month  a  full  statement  show- 
ing the  complete  condition  of  its  business.  By  such  means 
the  central  bank  is  enabled  to  exercise  a  steady  and 
effective  control  over  the  branches.  In  addition  each 
branch  office  is  subjected  to  a  rigid  inspection  once  every 
year  which  is  conducted  by  a  committee  named  by  the 
council    of    supervision    of    the    central    bank    in    con- 


Personal  Credit  27 

junction   with   the    chief    inspector   of   the    cooperative 
union. 

In  this  manner,  the  Agricultural  Central  Loan  Bank 
for  Germany  has  been  enabled  to  retain  its  genuinely 
cooperative  character  in  spite  of  its  formation  as  a  joint- 
stock  company.  It  transacts  business  in  its  wider  sphere 
practically  on  the  same  cooperative  lines  as  the  local 
credit  banks  do  on  a  smaller  scale.  The  fact  of  its  being 
registered  as  a  joint-stock  company  facilitates  its  business 
with  the  money  market  and,  through  its  share  capital, 
provides  for  itself  a  working  fund  which  cannot  be  af- 
fected by  any  changes  occurring  which  influence  local 
banks.  By  keeping  the  money  transactions  with  rural 
banks  in  its  own  hands,  it  is  in  a  position  to  charge  lower 
rates  to  these  banks  than  they  could  secure  by  dealing 
with  independent  commercial  or  provincial  banks.  More- 
over, by  means  of  its  branch  offices,  the  central  bank  se- 
cures the  information  regarding  the  financial  status  of 
local  rural  banks  which  is  required  for  the  proper  appor- 
tionment of  credit.  It  is,  therefore,  a  central  bank  which 
is  based  entirely  upon  self-help  and  self-government  and 
combines  in  itself  all  the  advantages  both  of  a  centralized 
and  a  decentralized  clearing  house  for  money. 

SAVINGS    BANK   FUNDS   FOR   FARMERS 

In  addition  to  the  strictly  rural  credit  banks  which 
furnish  money  and  supplies  to  their  members,  there  are 
many  other  savings  banks  which  have  special  departments 
for  the  purpose  of  making  loans  to  farmers.  These  are 
generally  known  throughout  Europe  as  ''people's  banks," 
since  they  originated  in  cities  as  a  means  of  encouraging 


28  Principles  of  Rural  Credits 

saving  and  thrift  among  the  working  people  of  the  indus- 
trial and  lower  classes.  By  means  of  paid-up  share  capital, 
surplus  funds,  and  savings  deposits,  many  of  these  people's 
banks  accumulated  a  large  working  capital,  and  when 
these  funds  exceeded  the  demand  of  the  bank's  members 
for  loans,  outside  sources  for  investment  were  sought. 
Hence  these  banks  extended  their  field  of  membership 
to  include  the  rural  population. 

In  Germany,  where  this  type  of  bank  is  known  as 
Schulze-Delitzsch  banks,  the  membership  for  1911  shows 
that  26.61  per  cent  are  classed  as  independent  farmers 
and  2.42  per  cent  as  wage-earning  farmers.  At  the  present 
time,  therefore,  probably  over  one-fourth  of  their  mem- 
bers are  farmers  notwithstanding  their  urban  origin. 
One  of  the  recognized  purposes  of  these  banks  is  to  conduct 
a  savings-bank  business  and  put  such  savings  to  the  most 
productive  use  in  rural  districts. 

On  account  of  their  urban  origin  and  extended  area 
of  operation,  which  often  covers  a  whole  county,  the 
occupation  of  members  ranges  over  a  great  variety  of 
callings  and  the  membership  is  quite  large.  For  this 
reason,  it  would  be  impossible  for  any  one  member  to 
know  any  large  number  of  the  other  members.  Conse- 
quently, there  has  developed  a  difference  in  the  personal 
liability  of  the  members.  In  Germany  in  1911,  out  of  952 
banks  of  this  type  which  reported,  563,  or  59.1  per  cent, 
were  of  the  unlimited  liability  type,  while  385,  or  40.5 
per  cent,  had  limited  liability,  and  4  others  were  of  a  special 
mixed  type  having  unlimited  liability  to  make  supple- 
mentary payments.  In  Austria,  out  of  3,599  banks  of 
this  type  reporting  in  1912,  only  603  had  unlimited  lia- 


Personal  Credit  29 

bility  while  2,996  had  adopted  the  principle  of  limited 
liability. 

The  general  tendency  of  the  people's  banks,  therefore, 
is  plainly  toward  limited  liability.  Nevertheless,  although 
this  plan  is  steadily  increasing,  unlimited  liability  is  still 
considered  the  better  system  on  which  to  establish  these 
popular  banks  in  districts  which  are  not  yet  familiar  with 
cooperative  credit.  The  system  of  unlimited  liability 
seems  to  work  particularly  well  when  the  societies  are 
just  beginning  and  while  the  membership  is  small  and 
the  members  acquainted  with  each  other. 

The  principles  and  policies  of  these  popular  banks, 
especially  in  their  dealings  with  rural  communities,  follow 
very  closely  those  of  Raiffeisen  rural  credit  banks.  They 
are  operated  on  strictly  democratic  principles.  Each 
member  has  one  vote  only,  no  matter  how  many  shares 
he  may  hold.  Moreover,  the  shares  are  strictly  personal, 
and  no  shareholder  can  hold  more  than  one  thousand 
dollars'  worth  of  shares.  The  result  is  that  the  shares 
of  the  people's  banks  are  entirely  removed  from  the 
sphere  of  speculation.  The  administrators  are  selected 
by  the  shareholders  and  in  nearly  all  cases  give  their  serv- 
ices gratuitously.  The  work  of  this  board  is  supervised 
by  a  board  of  revisers  who  also  audit  the  accounts  and 
become  personally  responsible  to  the  shareholders.  Every 
year  a  balance  sheet  is  published  and  submitted  to  the 
general  assembly  of  the  shareholders  who  thus  exercise  a 
control  over  the  administrators  and  auditors  of  the 
people's  banks.  The  profits  of  the  banks  are  mostly 
added  to  the  reserve  fund  which  becomes  the  absolute 
guaranty   of   the   savings   deposits   they   receive.     The 


30  Principles  of  Rural  Credits 

people's  banks  enjoy  a  very  superior  credit  as  a  result 
of  this  policy. 

The  people's  banks  deal  with  individual  farmers  and 
agricultural  associations.  With  individuals  loans  are 
granted  on  indorsed  notes  in  the  absence  of  collateral. 
The  people's  banks  also  give  credit  accounts  to  farmers. 
Another  form  in  which  they  come  to  the  assistance  of 
farmers  is  the  following:  Many  farmers  have  a  great  ob- 
jection to  signing  a  promissory  note.  In  order  to  facilitate 
matters,  however,  the  people's  banks  will  accept  from 
the  agricultural  associations  the  invoices  for  goods  de- 
livered to  the  farmers  and  signed  by  them.  In  very  small 
districts  they  will  even  accept  invoices  for  goods  if  un- 
signed by  the  man  to  whom  the  goods  have  been  delivered, 
because  the  value  of  the  goods  is  known  as  well  as  the 
character  of  the  people  who  deal  with  the  associations. 
Hence  they  do  not  hesitate  to  give  this  form  of  credit. 

To  the  agricultural  associations,  the  people's  banks 
not  only  give  open  accounts  for  general  purposes  to  be 
used  at  their  discretion,  but  they  also  give  lines  of  credit 
for  special  purposes,  such  as  the  purchase  of  seeds,  live 
stock,  and  general  farm  requirements.  These  special 
open  accounts  are  settled  when  the  agricultural  associa- 
tions have  made  their  settlement  with  the  farmers. 

Still  another  form  in  which  the  people's  banks  come  to 
the  assistance  of  farmers  is  that  of  assisting  the  small 
rural  Raiffeisen  banks.  These  small  banks  frequently 
would  not  be  able  to  carry  on  their  work  for  the  farmers 
if  they  were  not  able  to  discount  their  notes  with  the 
people's  banks.  The  latter  are  so  organized  that  they  are 
able  to  get  into  intimate  touch  with  the  rural  banks  and 


Personal  Credit  31 

are  thus  able  safely  to  discount  their  notes.  In  this  con- 
nection, the  people's  banks  serve  the  purpose  of  a  central 
Raiffeisen  bank. 

The  granting  of  short-time  credit  to  individual  farmers 
is  usually  by  means  of  notes  indorsed  by  two  signatures. 
When  an  invoice  for  goods  is  accepted,  it  is  regarded  as 
a  note  with  one  indorsement.  That  is  to  say,  the  invoice 
is  signed  by  the  agricultural  association  with  the  signature 
of  the  farmer  who  purchased  the  goods.  Thus  the  farmer 
is  responsible  to  the  association  and  the  latter  to  the 
people's  bank.  Invoices  for  goods  usually  run  from  three 
to  six  months. 

Loans  on  notes  indorsed  by  two  signatures  usually 
run  for  a  period  of  six  months,  renewable  for  another 
period  of  six  months;  but  at  the  expiration  of  this  second 
period  the  loan  must  be  paid.  These  short-time  loans  are 
made  for  the  purchase  of  seeds  and  fertilizers.  In  order 
to  get  such  a  loan,  the  borrower  must  first  obtain  a  cer- 
tificate from  the  agricultural  association  of  which  he  is  a 
member  guaranteeing  that  the  loan  will  really  be  used  for 
that  purpose.  When  loans  are  made  for  the  purchase  of 
seeds  or  fertilizers,  the  rate  of  interest  charged  by  some 
banks  is  as  low  as  2  per  cent;  when  made  for  other  agri- 
cultural purposes  the  rate  is  3  per  cent.  The  local  banks 
which  discount  these  notes  are  allowed  to  charge  an  extra 
1  per  cent  on  the  2-per-cent  loans  and  an  extra  one-half 
per  cent  on  the  3-per-cent  loans,  thus  raising  the  interest 
rates,  respectively,  to  3  and  3J^  per  cent.  Lately  in  Italy, 
so  as  to  insure  these  facilities  being  used  by  small  farmers, 
the  maximum  amount  of  loan  allowed  to  each  farmer  on 
these  notes  has  been  fixed  at  $400.    The  rate  of  interest 


32  Principles  of  Rural  Credits 

was  also  uniformly  fixed  at  2s  4  per  cent  to  the  local  rural 
banks  on  the  condition  that  the  banks  that  indorsed  the 
notes  and  discounted  them  should  charge  a  maximum 
rate  of  interest  of  3} o  per  cent  only. 

All  the  credit  granted  under  these  heads  by  the  people's 
banks  through  the  local  banks  is  allowed  only  when  a 
voucher  is  produced  from  the  agricultural  association 
certifying  that  the  loan  will  be  used  for  agricultural  pur- 
poses. The  people's  bank  also  grants  open  accounts — 
lines  of  credit — to  agricultural  associations  at  Zx/i  per  cent 
interest,  but  these  accounts  must  be  guaranteed  by  the 
signature  of  the  association  and  by  other  acceptable  sig- 
natures. 

In  the  Schulze-Delitzsch  system  of  people's  banks  in 
Germany,  the  interest  charged  on  loans  ranges  from  4  to 
5  per  cent.  These  banks  paid  interest  on  deposits  which 
was  usually  from  one-quarter  to  one-half  per  cent  more 
than  the  interest  paid  by  ordinary  savings  banks.  The 
security  enjoyed  by  depositors  in  these  banks  is  based 
upon  the  unlimited  liability  feature  of  92  per  cent  of  all 
banks,  a  common  knowledge  as  to  the  standing  of  the 
members,  the  control  of  each  society  by  its  own  council 
of  supervision,  and  the  audit  of  accounts  by  outside  ac- 
countants working  under  the  direction  of  the  central 
bank. 

The  difference  between  a  commercial  bank  and  the 
people's  banks  in  Italy  is  that  the  former  obtains  its  capital 
from  the  shares  subscribed  by  shareholders,  while  the  latter 
are  endowed  by  communes,  provinces,  and  benefactors' 
foundations.  People's  banks  thus  founded  have  no  divi- 
dends to  distribute  and  they  are  thus  enabled  to  make 


Personal  Credit  33 

loans  at  lower  rates  than  regular  savings  banks.  They  pay 
a  rather  lower  rate  of  interest  on  deposits  than  they  charge 
for  loans;  yet  the  small  difference  between  these  two  rates 
of  interest  has  enabled  them  to  accumulate  large  reserve 
funds  which  help  them  to  earn'  on  their  work. 

In  central  and  southern  Italy,  where  cooperative  live- 
stock insurance  societies  are  being  rapidly  formed,  there 
is  a  strong  tendency  to  connect  them  with  those  rural 
credit  banks  which  assist  farmers  to  purchase  live  stock. 
In  this  way  the  insurance  policy  serves  as  a  guaranty  for 
the  loan  advanced  for  the  purchase  of  the  live  stock.  To 
facilitate  control,  all  animals  insured  are  marked  so  that 
they  can  be  recognized. 

While  in  most  countries  the  rural  and  people's  banks 
are  subject  to  government  inspection  in  one  form  or  an- 
other, still  the  real  and  effective  control  after  all  is  that 
exercised  by  their  own  officers. 

MODIFICATION    OF    THE    RAIFFEISEN    SYSTEM 

Not  all  farmers  in  Europe  are  inclined  to  organize  them- 
selves into  unlimited  liability  societies  in  order  to  improve 
their  credit  conditions.  There  is  a  tendency  in  some  coun- 
tries to  accept  limited  liability  of  the  members  for  the 
debts  of  the  society  as  well  as  to  make  other  material 
changes  in  organization.  This  is  the  case  as  regards  both 
rural  banks  and  credit  supply  associations  whether  these 
organizations  have  been  promoted  by  the  farmers  them- 
selves or  encouraged  by  the  government,  and  the  modifi- 
cations of  Raiffeisen  principles  have  been  made  in  order  to 
meet  different  conditions  in  various  countries.  The  most 
important  of  these  modifications  are  worth  noting  as  a 


34  Principles  of  Rural  Credits 

guide  to  farmers  in  other  countries  who  may  hesitate  to 
adopt  the  principle  of  unlimited  liability  and  who  may 
desire  to  organize  on  a  slightly  different  basis. 

In  Italy  special  legislation  was  enacted  in  1884  to  encour- 
age the  formation  of  rural  cooperative  associations,  and 
under  this  impulse  they  have  become  very  powerful  organi- 
zations. These  societies  come  under  special  provisions  of 
the  commercial  code.  Most  of  these  societies  are  based  on 
the  limited  liability  of  the  members,  though  a  few  of  them 
have  elected  to  organize  as  unlimited  liability  associations 
on  much  the  same  principles  as  the  Raiffeisen  rural  credit 
banks.  The  shares  they  issue  are  of  small  value,  ranging 
from  $2  to  $10.  They  count  among  their  members  all 
classes  of  farmers,  both  large  and  small,  who  by  their 
rules  are  only  responsible  for  the  liabilities  of  the  associa- 
tion to  the  extent  of  the  value  of  the  shares  they  hold. 
No  member  may  hold  shares  to  a  value  exceeding  $1,000, 
and  no  share  may  exceed  a  value  of  $20.  The  shares 
are  personal,  unnegotiable,  and  only  transferable  by  the 
express  consent  of  the  general  assembly  and  the  officials 
of  the  associations. 

The  prime  purpose  of  these  agricultural  cooperative 
associations  is  the  collective  purchase  of  farm  require- 
ments. They  also  undertake  to  test  machinery,  seeds, 
fertilizers,  and  so  on,  which  they  sell  to  members,  and  in 
this  way  they  effectively  promote  the  development  of 
agriculture.  They  also  assist  their  members  in  the  pur- 
chase of  farm  supplies  by  granting  them  credit  on  easy 
terms. 

The  form  most  generally  adopted  by  these  cooperative 
associations  is  that  by  which  the  members  receive  the 


Personal  Credit  35 

goods  they  order  partly  on  credit.  But  in  order  to  afford 
their  members  credit  on  their  purchases,  the  associations 
have  to  obtain  money  which  they  generally  raise  by  means 
of  promissory  notes.  These  are  discounted  for  the  associa- 
tions by  the  central  credit  bank. 

Another  form  of  credit  open  to  well-established  cooper- 
ative supply  associations  is  that  of  a  current  account 
with  a  central  credit  bank.  This  is  granted  to  each  associa- 
tion to  the  extent  of  $40,000.  Many  of  these  associations 
also  accept  from  their  members  promissory  notes  for  their 
unpaid  accounts,  and  these  notes  are  discounted  by  the 
credit  bank  with  which  the  association  does  business. 

Credit  is  also  given  by  accepting  from  the  purchaser 
the  signed  invoice  for  the  goods  which  he  has  not  paid 
for,  this  invoice  being  indorsed  by  the  association  and  the 
money  secured  on  it  from  the  central  credit  bank. 

In  the  north  of  Italy  it  is  generally  the  savings  banks 
and  the  people's  banks  which  give  open  accounts  to  the 
associations.  In  central  and  southern  Italy,  special  legis- 
lation provides  credit  for  them  on  better  terms  than  they 
could  obtain  on  the  open  market.  In  Umbria,  for  example, 
there  are  special  institutions  for  providing  these  associa- 
tions with  credit;  in  southern  Italy  and  in  Sardinia,  the 
Bank  of  Naples  has  been  authorized  by  special  legislation 
to  devote  a  portion  of  its  reserve  fund  for  granting  rural 
credit,  and  the  Bank  of  Sicily  has  been  authorized  to  do 
likewise. 

The  rate  of  interest  charged  by  these  different  institu- 
tions varies  greatly.  The  savings  banks  and  the  people's 
banks  of  northern  Italy  charge  a  rate  varying  from  5  to 
7  per  cent  corresponding  closely  to  the  rate  of  discount 


36  Principles  of  Rural  Credits 

of  the  Bank  of  Italy.  But  in  central  and  southern  Italy 
and  in  the  islands  which  come  under  special  legislative 
provisions,  the  rate  of  interest  charged  is  as  low  as  3}--2  P^r 
cent  and  must  not  exceed  -4  per  cent.  The  time  allowed  is 
from  six  months  to  one  year.  The  guaranty  is  regulated 
by  special  legislative  provisions.  The  loans  are  guaranteed 
sometimes  on  the  farmer's  crops  and  sometimes  by  chattel 
security  or  land  mortgage. 

There  are  about  1,500  of  these  cooperative  supply  associ- 
ations of  different  types  in  Italy.  Some  are  very  small 
and  work  within  a  very  limited  area  of  operation;  but 
others  are  quite  large  and  do  a  business  to  a  value  of 
over  8600,000  a  year.  In  Sicily  the  supply  associations 
are  not  organized  as  separate  societies;  their  work  is  done 
by  the  local  rural  credit  banks  and  their  business  grows 
with  the  progress  of  the  banks. 

About  700  of  these  agricultural  cooperative  supply 
associations  are  united  with  the  federation  at  Piacenza, 
which  has  branch  offices  in  Rome.  Naples,  and  Catania 
in  Sicily.  An  idea  of  the  activity  of  these  associations 
can  be  obtained  by  an  examination  of  the  statistics  of 
the  federation.  In  1909  there  were  650  associations  be- 
longing to  the  federation,  with  125,000  members,  and  a 
capital  and  reserve  fund  amounting  to  $2,600,000.  The 
business  done  during  that  year  amounted  to  S16, 000,000. 
As  the  number  of  federated  associations  has  since  increased 
to  more  than  700,  on  this  basis  they  are  now  supplying  the 
farmers  with  machinery,  seeds,  fertilizers,  and  other  farm 
requirements,  partly  for  cash  and  partly  on  credit,  to  a 
value  of  over  820,000,000  a  year. 

This  federation  was  founded  in  1892.     As  a  rule  the 


Personal  Credit  37 

credit  granted  to  the  supply  associations  is  short-time 
credit,  that  is  from  six  months  to  a  year;  but  in  the 
south  of  Italy  credit  is  extended  to  as  long  as  two  or 
three  years. 

In  Hungary,  the  government  took  an  interest  in  organiz- 
ing cooperative  credit  banks  and  a  central  bank,  and  in 
so  doing  modified  to  some  extent  the  Raiffeiaen  principles. 
An  act  was  passed  in  1898  which  provided  that  certain 
favors  would  be  granted  to  those  rural  credit  banks  that 
should  be  organized  in  conformity  to  the  strict  rules  pre- 
scribed by  the  law.  Moreover,  by  means  of  government 
aid,  a  national  central  credit  bank  was  established  for 
the  benefit  of  the  rural  credit  banks,  the  task  of  the  central 
bank  being  to  control,  direct,  and  supply  with  necessary 
capital  the  credit  banks  founded  and  operated  in  con- 
formity with  the  law.  The  most  essential  provisions  of 
the  act  are  as  follows : 

Agricultural  cooperative  credit  banks  organized  under 
the  law  may  only  be  founded  by  administrative  local 
government  authorities:  by  public  corporations  such  as 
agricultural  associations,  chambers  of  commerce  and 
industry,  and  industrial  corporations:  or,  finally,  by  the 
Hungarian  Central  Cooperative  Credit  Society,  an  in- 
stitution under  government  subsidy. 

The  sphere  of  activity  of  such  credit  societies  is  limited 
to  a  particular  township  or  at  most  to  certain  clearly- 
defined  districts  of  restricted  area.  Each  member  is 
bound  to  subscribe  for  one  share  only;  but  at  the  general 
assembly  no  member  is  entitled  to  more  than  one  vote  even 
if  he  owns  several  shares.  The  value  of  shares  must  not 
exceed  $20,  and  not  more  than  5  per  cent  dividend  may 


38  Principles  of  Rural  Credits 

be  paid  on  said  shares.  The  remuneration  paid  to  direc- 
tors may  not  exceed  10  per  cent  of  the  net  profits,  and 
the  remainder  of  the  profits  must  be  added  to  the  reserve 
fund.  Cooperative  credit  banks  may  do  business  with 
their  members  only,  but  they  may  accept  savings  de- 
posits from  nonmembers.  The  members  are  liable  for 
the  debts  of  the  credit  society  up  to  a  sum  representing 
five  times  the  amount  of  the  nominal  value  of  the  shares 
held  by  them;  but  this  liability  can  only  be  enforced  in 
case  of  the  bankruptcy  of  the  society. 

Members  can  withdraw  from  cooperative  credit  socie- 
ties only  after  six  months'  notice.  In  cases  of  execution 
or  bankruptcy  resulting  from  claims  against  their  own 
members,  cooperative  credit  societies  affiliated  with  the 
parent  institute  have  a  prior  right,  as  compared  with  all 
other  creditors,  to  the  whole  movable  property  of  the 
debtors,  though  only  when  the  claims  of  such  other  cred- 
itors date  from  a  period  subsequent  to  the  debtors'  ad- 
mittance into  the  Credit  societies.  The  rolls  of  members 
may  be  inspected  by  anyone,  and  cooperative  credit 
societies  are  bound  to  inform  everyone  who  makes  a  re- 
quest to  that  effect  as  to  the  total  amount  of  the  liabilities 
of  the  members.  Besides  the  board  of  directors,  the 
members  of  the  credit  societies  must  elect  a  committee  of 
supervision.  This  committee  examines  the  books  and 
accounts  of  its  society  at  least  once  every  three  months; 
it  may  take  part  in  the  sittings  of  the  board  of  directors; 
it  audits  the  annual  financial  statement  and  performs  all 
the  duties  intrusted  by  the  mercantile  law  to  committees 
of  supervision  of  limited-liability  companies  or  coopera- 
tive societies. 


Personal  Credit  39 

These  are  the  main  features  of  the  Hungarian  law  re- 
lating to  rural  credit  banks  and  supply  societies  which 
grant  personal  or  short-time  credit  to  their  members. 
The  act  did  not  follow  strictly  the  principles  of  Raif- 
feisen  rural  credit  banks,  but  created  a  system  which, 
under  existing  conditions  in  Hungary,  appeared  to  be  the 
best  and  which  has,  as  a  matter  of  fact,  proved  a  bril- 
liant success. 

While  the  Hungarian  Central  Cooperative  Credit  So- 
ciety is  not  a  state  institution,  the  national  treasury 
contributed  toward  its  foundation  the  sum  of  $250,000. 
By  the  law,  moreover,  the  government  is  granted  certain 
rights  over  its  affairs.  The  president  of  the  bank  is  ap- 
pointed by  the  king  on  the  recommendation  of  the  minis- 
ter of  finance,  and  the  two  vice-presidents  are  appointed 
by  the  ministers  of  commerce  and  agriculture,  respectively. 
Moreover,  the  minister  of  finance  appoints  two  members 
of  the  board  of  directors  and  one  member  of  the  com- 
mittee of  supervision,  and  the  election  of  a  managing  di- 
rector by  the  board  from  among  its  own  members  is  sub- 
ject to  the  confirmation  of  the  minister  of  finance. 

For  the  purpose  of  controlling  and  superintending  the 
management  of  the  central  credit  bank's  affairs,  the 
minister  of  finance  appoints  a  government  commissioner 
who  may  protest  against  any  resolutions  conflicting  with 
the  articles  of  incorporation,  in  which  case  the  said  resolu- 
tions of  the  board  of  directors  are  suspended  pending  a 
decision  by  the  minister  of  finance. 

The  Hungarian  Central  Cooperative  Credit  Society 
may  be  regarded  as  a  genuine  cooperative  society  not- 
withstanding the  fact  that  the  system  of  founders'  shares 


40  Principles  of  Rural  Credits 

has  been  applied  in  its  organization.  But  the  members 
which  constitute  the  central  credit  society  are  the  co- 
operative credit  and  supply  societies  affiliated  with  it. 
These  are  bound  to  subscribe  for  a  certain  number  of 
shares  in  the  central  bank  with  a  liability  of  five  times 
the  nominal  value  of  the  shares  held  by  each  society. 
Through  their  delegates  at  general  meetings  as  well  as  in 
the  elections  of  the  board  of  directors  and  the  committee 
of  supervision,  the  cooperative  societies  exercise  a  practical 
control  over  the  central  credit  society.  Moreover,  the 
affiliated  societies  exert  an  influence  on  the  spirit  and 
management  of  the  central  bank  at  the  annual  congress, 
where  questions  concerning  the  whole  organization  are 
debated,  since  the  resolutions  passed  at  the  annual  con- 
gress must  be  discussed  by  the  general  meeting  of  the 
parent  institute.  On  founder's  and  ordinary  shares,  the 
central  bank  cannot  pay  more  than  4  per  cent  dividend. 

At  the  same  time,  the  central  bank  has  authority  to 
inspect  the  cooperative  societies  affiliated  with  it.  The 
central  bank  also  settles  the  general  conditions  relating 
to  the  business  of  such  societies  as  well  as  those  concerning 
savings  deposits.  The  work  of  inspection  and  control 
is  carried  out  as  follows : 

Not  less  than  twice  a  year  the  central  bank's  inspectors 
visit  the  cooperative  societies,  investigate  their  methods 
of  doing  business,  offer  advice  and  give  instructions  to 
the  managers,  and  inform  the  central  bank  of  every  move- 
ment of  said  local  credit  societies.  Where  necessary,  the 
central  bank  may  ask  for  a  bankruptcy  order  against  any 
cooperative  society  or  it  may  have  such  wound  up.  In 
practice,  the  central  bank  only  enforces  the  winding  up 


Personal  Credit  41 

of  such  local  credit  societies  which  are  not  capable  of 
maintaining  themselves.  In  certain  cases  in  which  it  be- 
comes evident  in  the  process  of  liquidation  that  not  even 
the  fully  paid-up  shares  are  sufficient  to  cover  the  losses 
of  the  respective  societies,  the  central  bank,  which  is 
usually  the  sole  creditor  of  the  local  banks,  remits  that 
part  of  its  claims  which  cannot  be  met,  so  as  to  avoid  the 
necessity  of  applying  for  an  order  in  bankruptcy  and  an 
enforcement  of  the  liability  of  the  members. 

It  must  be  remarked,  however,  that  ever  since  the  es- 
tablishment of  the  Hungarian  central  credit  bank  there 
has  not  been  a  single  instance  of  a  cooperative  credit 
society  affiliated  with  it  having  become  bankrupt,  so  that 
no  occasion  has  ever  arisen  for  enforcing  the  liability  of 
members. 

One  of  the  duties  of  the  central  bank  is  to  supply  the 
affiliated  cooperative  credit  societies  with  funds.  The 
money  required  for  this  purpose  is  obtained  by  the  central 
bank,  in  addition  to  its  own  capital,  from  the  current 
account  deposits,  by  rediscounting  bills  drawn  on  it  by 
the  affiliated  societies,  and  by  issuing  tax-free  debentures 
on  the  basis  of  bonds  made  out  by  the  members  of  the 
local  credit  societies  and  transferred  to  the  central  bank 
subject  to  the  liability  of  the  said  local  societies.  The 
right  to  issue  tax-free  debentures  is  granted  to  the  central 
bank  by  the  act  of  1898.  But  the  act,  not  considering  a 
5  per  cent  guaranty  fund  sufficient  security  for  these  de- 
bentures, insists  on  the  creation  of  a  guaranty  fund  of 
at  least  10  per  cent;  and  the  government  contributed 
$750,000  toward  the  creation  of  a  special  guaranty  fund 
for  the  security  of  these  debentures. 


42  Principles  of  Rural  Credits 

Local  cooperative  credit  societies  affiliated  with  the 
central  bank  are  exempted  by  the  act  from  the  payment 
of  trade  taxes  on  the  amount  of  business  transacted,  and 
are  also  entitled  to  considerable  exemptions  as  regards 
stamp  and  other  dues.  The  central  bank  enjoys  these 
same  privileges  as  well  as  exemption  from  the  payment  of 
postage  dues,  but  it  is  not  exempted  from  stamp  dues  on 
drafts  and  bills  of  exchange. 

The  data  on  the  development  of  the  Hungarian  Central 
Cooperative  Credit  Society  show  that  in  14  years  2,412 
local  cooperative  credit  societies  had  become  affiliated 
with  it,  and  that  the  amount  of  credit  granted  to  them  by 
the  central  society  amounted  to  more  than  $25,000,000. 
The  activity  of  the  affiliated  societies  already  extends  to 
some  8,000  parishes,  or  to  more  than  half  the  parishes  in 
Hungary.  This  result  far  surpasses  the  expectations  of 
the  government  when  it  established  the  central  cooperative 
bank  practically  as  a  mere  experiment. 


CHAPTER  III 

GOVERNMENT  AID  FOR  PROMOTING  PERSONAL 
CREDIT  AMONG  LANDOWNING  FARMERS 

France  undoubtedly  leads  all  countries  in  promoting 
personal  credit  among  farmers  by  cooperative  rural  credit 
societies.  The  first  step  toward  the  establishment  of  an 
agricultural  credit  system  in  France  was  to  organize 
personal  credit  from  below  by  fixing  the  roots  of  the 
system  in  the  agricultural  population  itself. 

OUTLINE   OF  THE   FRENCH   SYSTEM 

Formerly,  the  idea  prevailed  among  French  statesmen 
that  agricultural  credit  could  only  be  established  by  the 
formation  of  great  central  banks  from  which  credit  would 
flow  out  to  all  the  local  credit  centers.  But  when  the 
government  of  France  finally  took  up  in  earnest  the  ques- 
tion of  agricultural  credit,  it  was  planned  on  an  entirely 
different  principle.  It  was  decided  that  rural  credit  should 
begin  with  the  lowest  group;  that  the  agricultural  coopera- 
tive society  should  form  its  own  credit  bank  which  should 
grow  from  its  own  activity.  The  French  system  of  rural 
credit,  therefore,  began  with  the  local  cooperative  so- 
cieties; out  of  these  grew  the  district  or  departmental 
banks,  which  are  usually  located  in  the  principal  town  or 
city  of  a  department;  and,  finally,  there  is  the  central 
federation  of  rural  credit  societies  which  unite  local  and 

43 


44  Principles  of  Rural  Credits 

district  banks  into  a  single  organization.  But  the  develop- 
ment of  this  system  has  been  from  the  growth  of  the 
small  local  units.  There  were  in  1913  more  than  4,000 
local  rural  credit  banks  in  France  and  100  regional  or 
district  banks.  About  1,000  of  the  local  banks  have 
adopted  the  principle  of  unlimited  liability,  while  the 
other  3,000  or  more  operate  under  the  principle  of  limited 
liability.  The  French  system  of  Raiffeisen  rural  credit 
societies,  therefore,  differs  materially  from  that  of  Ger- 
many where  the  local  rural  banks  are  chiefly  based  on  the 
principle  of  unlimited  liability  of  their  members. 

The  foundation  upon  which  agricultural  credit  in  France 
is  built  are  the  laws  of  1894  and  1899  for  promoting  per- 
sonal or  short-time  rural  credit.  At  the  time  the  law  of 
1894  was  proposed,  the  agricultural  societies  were  already 
strongly  organized  and  formed  a  valuable  nucleus  for 
establishing  a  sound  rural  credit  system.  The  other 
guiding  principle  which  the  French  government  sought 
to  incorporate  in  its  rural  credit  system  was  that  of  mutual 
aid.  Thus,  when  the  Chamber  of  Deputies  undertook  to 
organize  personal  rural  credit  in  1894,  the  different  agri- 
cultural cooperative  societies  were  taken  as  the  basis 
of  the  system. 

Under  the  law,  credit  societies  in  France  may  organize 
on  the  principle  of  either  limited  or  unlimited  liability. 
If  the  members  choose  to  organize  on  the  principle  of 
limited  liability,  all  the  members  are  not  responsible  for  a 
debt  which  any  one  of  them  may  have  contracted  toward 
the  society;  but,  when  organized  on  the  principle  of  un- 
limited liability,  the  entire  group  becomes  responsible  for 
the  indebtedness  to  the  society  of  any  one  of  its  members. 


Personal  Credit  45 

The  objects  of  local  cooperative  societies  are  to  promote, 
guarantee,  facilitate  and  meet  the  agricultural  opera- 
tions and  requirements  of  their  members.  To  accomplish 
these  ends  more  readily,  certain  concessions  have  been 
granted  by  the  government  to  these  organizations.  The 
law,  for  example,  is  simplified  to  the  utmost  as  regards  their 
formation,  and  cooperative  societies  are  relieved  of  taxa- 
tion. 

Thus  far,  however,  the  law  had  created  an  instrument  of 
credit  only  without  a  money  discount  to  correspond  there- 
with. Legally  a  farmer  could  make  out  a  bill  of  exchange, 
but  he  was  unable  to  discount  that  bill  for  cash.  This  was 
not  because  France  did  not  have  plenty  of  money  and 
plenty  of  banks  for  discounting  notes.  As  a  matter  of 
fact,  the  Bank  of  France  maintains  a  lower  rate  of  discount 
than  is  practiced  in  any  other  country  of  Europe,  ranging 
from  3  to  4  per  cent.  In  1911  the  Bank  of  France  did  a 
discounting  business  of  $5,000,000,000,  and  five  other 
great  banks  discounted  together  $900,000,000.  Any 
difficulty  which  the  farmer  experienced,  therefore,  could 
not  be  attributed  to  the  lack  of  money. 

But  the  credit  difficulties  of  the  French  farmer  arose 
from  the  nature  of  his  industry.  The  farmer  is  a  slave  of 
the  soil.  The  land  grows  his  crops,  but  this  requires  some 
time.  The  average  period  for  which  the  farmer  requires 
personal  credit  is  about  eight  months.  In  1894  an  inter- 
est rate  of  8  per  cent  for  this  length  of  time  was  charged 
by  private  banks,  and  this  on  investigation  the  French 
government  found  was  unreasonable  and  it  determined 
that  the  farmer  should  be  granted  other  facilities  for  dis- 
counting his  bills.    The  method  proposed  was  to  subsidize 


46  Principles  of  Rural  Credits 

the  rural  credit  banks  which  were  organized  to  discount 
farmers'  bills. 

CREDIT  LEGISLATION 

Two  years  after  the  enactment  of  the  law  of  1894,  which 
founded  this  system  of  agricultural  credit,  the  charter 
privilege  of  the  Bank  of  France  expired.  What  these 
charter  privileges  were  and  how  the  Bank  of  France  has 
assisted  agriculture  will  be  briefly  set  forth  later  on.  But 
the  bank's  charter  privilege  was  only  renewed  by  the  gov- 
ernment on  two  conditions:  (1)  That  the  Bank  of  France 
would  advance  to  the  government  the  sum  of  $8,000,000, 
free  of  interest,  for  use  in  subsidizing  the  rural  credit 
banks;  and  (2)  that  it  should  pay  a  yearly  sum  calculated 
at  one-eighth  per  cent  of  its  circulation,  but  not  to  be 
less  than  $400,000,  for  the  same  purpose.  As  a  mat- 
ter of  fact,  the  latter  sum  has  amounted  to  more  than 
$1,000,000  a  year  available  for  agricultural  credit. 

The  law  embodying  these  conditions  for  renewing  the 
charter  privileges  of  the  Bank  of  France  was  passed  in 
1896.  It  also  created  a  commission  composed  of  senators, 
representatives  of  local  banks,  directors  of  the  Bank  of 
France,  and  certain  other  commissioners.  In  connection 
with  the  department  of  agriculture,  this  commission  was 
to  decide  on  the  distribution  of  these  funds  to  the  regional 
rural  credit  banks. 

Under  its  charter  the  Bank  of  France  is  a  bank  of  issue; 
that  is  to  say,  its  function  is  to  issue  paper  money  and  reim- 
burse it.  The  bank  issues  notes  either  against  deposits  or 
on  the  guarantee  of  credit  operations,  but  it  is  prohibited 
from  issuing  notes  on  any  other  grounds.    The  repayment 


Personal  Credit  47 

of  the  $1,000,000,000  worth  of  notes  in  circulation  is, 
therefore,  guaranteed  either  in  coin  or  in  commercial 
paper  protected  by  bonds. 

The  notes  guaranteed  by  coin  are  not  a  source  of  legis- 
lative concern,  but  the  notes  guaranteed  by  commercial 
paper  and  bonds  demand  more  careful  attention.  Special 
care  has  to  be  taken  to  insure  the  quality  of  the  surety 
by  which  these  notes  are  guaranteed. 

In  the  first  place,  the  legislature  has  determined  that  the 
Bank  of  France  must  make  acceptances  for  a  longer  period 
than  three  months  where  such  paper  forms  the  security 
of  circulating  notes. 

In  the  second  place,  all  notes  discounted  must  be  in- 
dorsed by  three  persons  of  known  solvability  and  who 
become  collectively  responsible  for  the  bill.  One  of  these 
indorsements,  however,  may  be  replaced  by  the  deposit 
of  securities  with  the  Bank  of  France.  The  power  to 
determine  the  value  of  such  paper  is  left  to  the  bank's 
directors.  The  indorsement  may  also  be  replaced  by  de- 
positing a  warranty  of  goods. 

The  original  law  granting  these  charter  privileges  was 
signed  by  Napoleon  as  a  part  of  the  statutes  of  the  Bank 
of  France.  The  object  was  to  make  the" notes  issued  by 
the  bank  not  only  safe,  but  to  give  them  a  known  security. 

RELATION  OF  CREDIT  BANKS  IN  FRANCE 

Now,  it  is  not  difficult  to  see  the  relation  of  the  local 
and  regional  rural  credit  banks  to  the  Bank  of  France. 
The  local  banks  know  their  members  well,  with  the  result 
that  the  loans  they  grant  are  almost  always  paid.  Thus 
the  local  banks  guarantee  the  safety  of  their  loans  and  pass 


48  Principles  of  Rural  Credits 

on  their  security  to  the  regional  banks.  The  local  banks, 
therefore,  form  the  first  security  for  loans  to  local  farmers. 

The  regional  banks  alone  distribute  to  the  local  banks 
the  funds  placed  at  the  disposal  of  agricultural  credit  by 
the  government.  This  is  a  highly  valuable  service,  for 
it  would  be  impossible  for  the  government  to  have  knowl- 
edge of  more  than  four  thousand  local  banks  and  decide 
how  the  funds  should  be  distributed,  but  it  is  possible 
for  the  government  to  have  knowledge  of  the  hundred 
regional  banks. 

But  the  regional  banks,  besides  performing  the  duty 
of  distributing  the  government  money  for  credit  purposes 
to  the  local  rural  credit  banks,  fill  another  and  exceedingly 
important  function.  They  not  only  discount  the  bills 
of  the  local  banks,  but  they  indorse  them  with  their 
signature.  By  this  means  the  farmers'  notes  receive  the 
three  signatures  which  make  them  available  for  rediscount 
by  the  Bank  of  France  and  other  great  financial  institu- 
tions. The  farmer  first  indorses  his  note  himself,  it  is 
next  indorsed  by  the  local  credit  bank,  and  finally  is 
indorsed  by  the  regional  bank.  This  is  necessary  because, 
as  has  been  pointed  out,  the  Bank  of  France  can  only 
legally  rediscount  bills  indorsed  with  three  signatures. 
The  organization  of  the  regional  banks,  therefore,  has 
opened  the  Bank  of  France  to  all  French  farmers  through 
their  local  rural  credit  banks. 

The  amount  of  money  disbursed  by  these  two  kinds 
of  credit  banks  in  France  proves  their  importance  as  a 
means  of  financing  the  farmer.  In  1912  the  regional 
banks  advanced  for  personal  or  short-time  credit  to 
farmers  $12,000,000  derived  from  the  government  through 


Personal  Credit  49 

the  Bank  of  France,  and  $5,000,000  derived  from  their 
net  capital,  reserves,  and  deposits.  During  the  few  years 
the  regional  banks  have  been  established,  they  have  ac- 
cumulated a  reserve  fund  of  $1,000,000.  The  one  hundred 
regional  banks  are  administered  at  an  annual  cost  of  less 
than  $100,000,  which  is  proof  enough  of  their  economy  of 
management. 

On  the  other  hand,  the  4,000  local  rural  credit  banks 
have  a  combined  membership  of  more  than  200,000  and 
in  their  business  transactions  make  use  of  a  subscribed 
capital  of  more  than  $3,600,000.  In  1911  the  local  banks 
granted  new  loans  to  the  extent  of  $16,500,000,  in  addition 
to  more  than  $10,000,000  of  outstanding  loans  brought 
over  from  the  previous  year.  The  French  farmers  during 
the  year  repaid  the  rural  credit  banks  $14,500,000,  leaving 
outstanding  loans  at  the  close  of  1911  of  a  little  more  than 
$12,000,000.  It  is  evident,  therefore,  that  French  farmers 
are  well  provided  with  the  means  of  being  supplied  with 
personal  short-time  credit. 

HOW  THE  BANK  OF  FRANCE  AIDS  THE  FARMER 

In  its  business  relations  with  the  agricultural  credit 
banks,  the  Bank  of  France  has  been  somewhat  limited 
by  the  statutes  and  laws  laid  down  a  century  or  so  ago. 
In  order  for  farmers  to  avail  themselves  of  the  bank's 
facilities  for  supplying  them  with  personal  credit,  they 
have  to  conform  to  certain  legal  requirements.  Subject 
to  this  reservation,  however,  the  Bank  of  France  has 
always  made  every  effort  to  assist  the  farmer,  since  it  is 
an  institution  for  national  credit  and   recognizes  that 


50  Principles  of  Rural  Credits 

agriculture  in  France  is  even  more  important  than  manu- 
facturing. 

The  Bank  of  France  aids  agriculture  in  three  ways:  (1) 
It  helps  the  individual  farmer  to  secure  loans  and  dis- 
counts; (2)  it  makes  possible  the  success  of  the  rural 
credit  banks  and  facilitates  the  rediscounts  which  they 
offer  to  commercial  banks;  and  (3)  it  provides  the  govern- 
ment with  the  necessary  funds  for  supplying  the  needs 
of  the  rural  credit  banks. 

In  promoting  the  relations  of  the  local  banks  with  in- 
dividual farmers,  by  offering  discount  and  loan  facilities, 
the  Bank  of  France  has  encountered  a  fundamental  diffi- 
culty in  that  the  farmer,  under  the  French  law,  is  not 
considered  as  a  merchant  or  a  trader.     Consequently, 
the  law  of  bankruptcy  does  not  apply  to  farmers.    Their 
creditors  do  not  have  the  protection  that  the  creditors  of  a 
merchant  have.    The  French  law  of  bankruptcy  provides 
that,  if  a  business  man  becomes  bankrupt,  he  must  cease 
to  do  business.    In  this  case  the  proceedings  are  simplified 
for  the  creditors  and  they  are  also  guaranteed  an  equi- 
table share  of  the  assets  of  the  bankrupt.    In  order  to  facili- 
tate the  recovery  of  bad  debts  from  persons  who  do  not 
come  under  the  bankruptcy  law,  such  as  farmers,  it  is 
necessary  to  resort  to  the  law  of  restraint.     Under  this 
law,  however,  the  creditors  are  not  sure  of  an  equitable 
distribution  of  the  bankrupt's  assets,  since  they  are  paid 
in  the  order  of  the  restraints. 

Many  efforts  have  been  made  in  France  to  bring  farmers 
under  the  commercial  act  in  order  to  promote  rural  credit. 
All  such  efforts,  however,  have  hitherto  failed  because 
of  a  prevailing  sentiment  against  placing  farmers  under 


Personal  Credit  51 

the  commercial  law  and  thus  exposing  them  to  the  danger 
of  being  forced  into  bankruptcy.  The  Bank  of  France  has 
shared  in  this  general  feeling  of  solicitude  for  farmers. 
At  the  same  time,  instead  of  curtailing  rural  credit  on 
these  grounds,  it  has  provided  a  fund  for  granting  such 
credit  in  spite  of  the  legal  difficulties  of  recovering  debts. 
But  many  years  of  experience  have  proven  that  the  risk 
the  bank  runs  in  granting  farmers  credit  under  this  sys- 
tem is  reduced  to  the  minimum,  the  losses  having  been 
practically  nothing. 

The  Bank  of  France  has  stretched  out  a  helping  hand 
to  the  farmer  by  opening  branch  banks  in  provincial 
towns  to  the  number  of  570.  These  branch  banks  are 
located  in  all  towns  of  8,000  or  more  inhabitants,  and 
sometimes  are  even  placed  in  towns  of  less  importance. 
A  representative  farmer  is  made  a  member  of  the  board 
of  administration  of  each  branch  bank,  while  recently 
the  Bank  of  France  has  placed  on  its  general  board  a 
representative  of  the  agricultural  interests  to  sit  side  by 
side  with  the  representatives  of  the  great  financial,  com- 
mercial and  industrial  interests.  It  has  also  assisted  the 
farmers  by  means  of  an  educational  propaganda  which 
explains  to  them  the  advantages  offered  by  this  bank. 
Moreover,  the  Bank  of  France  has  always  insured  to  the 
poorest  farmer  the  same  rate  of  interest  for  money  that 
it  grants  to  capitalists.  This  rate  of  interest  has  generally 
been  3  per  cent;  but,  for  financial  and  political  reasons, 
this  was  recently  raised  to  4  per  cent. 

Another  evidence  of  the  bank's  interest  in  the  welfare 
of  farmers  is  shown  by  the  facilities  provided  whereby 
the  farmers  may  secure  the  three  indorsements  required 


52  Principles  of  Rural  Credits 

under  the  law  in  order  to  have  the  Bank  of  France  discount 
their  notes.  The  farmer,  for  instance,  can  replace  one  of 
the  indorsements  by  giving  once  for  all  a  general  guar- 
anty which  covers  his  whole  series  of  discount  operations. 
Another  method  of  replacing  a  required  signature  is  by 
depositing  papers  with  the  bank.  The  value  of  the  paper 
is  determined  by  the  bank  according  to  the  financial  status 
of  the  farmer,  and  the  bank  keeps  the  paper  at  the  lowest 
figure  according  to  that  standing.  A  third  way  in  which 
this  indorsement  can  be  replaced  is  by  the  deposit  of  a 
warrant  for  goods.  The  following  goods  may  be  pledged 
on  such  a  warrant:  All  harvest  products,  grain,  wine, 
straw,  in  certain  cases  live  stock,  and  so  on.  The  co>t  of 
the  warrant  is  20  cents  for  every  $200  borrowed  and  10 
cents  for  the  legal  stamp.  The  borrower  is  obliged  to 
keep  the  security  in  his  own  \  --  3sion  and  in  good  con- 
dition until  he  pays  his  debt.  But  he  may  sell  the  goods 
on  condition  that  he  immediately  pays  off  the  warrant 
held  by  the  Bank  of  France  and  that  he  gives  notice  to 
the  bank  before  delivering  up  the  goods  under  warrant. 

These  three  kinds  of  facilities  provided  by  the  Bank  of 
France  itself  have  made  it  possible  for  a  large  number  of 
farmers  to  avail  themselves  of  the  credit  offered  by  it 
without  having  to  comply  with  the  legal  requirement 
that  notes  must  carry  three  indorsements.  French  farmers 
can  thus  furnish  all  necessary  guaranties  by  obtaining 
the  signature  of  the  landowner,  if  the  borrower  is  a  tenant 
farmer,  or  of  one  of  their  relatives  or  friends  of  good  fi- 
nancial standing  who  is  willing  to  indorse  a  note  for  them. 
As  will  readily  be  recognized,  a  large  number  of  farmers 
were  unable  to  bring  together  these  three  forms  of  in- 


Personal  Credit  53 

dorsements  until  after  the  establishment  of  the  local 
rural  credit  banks.  In  fact,  it  was  to  supply  the  farmers 
of  France  with  the  means  of  getting  this  security  that 
these  local  banks  were  primarily  established. 

Another  difficulty  in  the  way  of  farmers  formerly  getting 
credit  from  the  Bank  of  France  was  the  legal  restriction 
which  limited  notes  discounted  by  the  bank  to  a  period 
of  three  months.  As  agricultural  personal  credit  in  France 
requires  loans  for  at  least  from  six  to  nine  months,  this 
difficulty  had  to  be  overcome.  It  was  accomplished  by 
the  Bank  of  France,  in  its  dealings  with  farmers,  renewing 
their  notes  every  three  months  free  of  charge.  Of  course, 
such  renewals  are  strictly  voluntary  on  the  bank's  part 
and  they  are  subject  to  the  general  economic  situation  of 
the  country.  But  refusal  of  renewal  has  seldom  been 
exercised.  The  economic  situation  alone  renders  a  bank 
of  issue  unable  to  supply  all  the  needs  of  personal  agri- 
cultural credit  no  matter  how  much  it  may  desire  to  assist 
farmers.  The  whole  question  of  the  renewal  of  farmers' 
notes  is  one  of  prudence.  The  solicitude  of  the  Bank  of 
France  for  agriculture,  however,  has  always  made  it 
possible  to  be  of  real  assistance,  especially  to  stock  breeders, 
by  granting  them  credit  for  fattening  their  cattle. 

Some  of  these  loans  are  quite  small,  while  others  are 
very  high  for  farmers.  Out  of  a  total  of  450  such  loans  to 
individual  farmers,  250  are  below  the  sum  of  $4,000. 
During  the  past  10  years  the  total  amount  of  these  loans 
is  about  $100,000,000,  and  this  figure  would  be  very  much 
higher  if  it  included  loans  which  are  apparently  granted 
for  commerce  and  industry,  but  which  indirectly  benefit 
agriculture. 


54  Principles  of  Rural  Credits 

The  Bank  of  France  also  makes  every  effort  to  assist 
the  local  rural  credit  banks.  As  has  been  explained,  the 
local  banks  have  two  functions.  In  the  first  place,  they 
act  as  independent  banks  so  far  as  their  capital  and  de- 
posits are  concerned.  The  advances  made  to  them  by  the 
government  put  them  on  an  independent  basis.  But, 
in  the  second  place,  as  soon  as  the  credit  demands  of  its 
members  exceed  a  bank's  resources,  it  is  still  able  to  assist 
them  by  rediscounting  their  notes  at  the  Bank  of  France 
through  the  regional  banks.  While  the  rural  credit  banks 
usually  rediscount  with  the  Bank  of  France,  they  are 
equally  at  liberty  to  rediscount  with  any  other  bank. 
Some  of  the  local  banks,  in  order  to  facilitate  the  dis- 
count of  their  bills,  have  placed  with  the  Bank  of  France 
a  fund  to  secure  such  discounts.  At  the  present  time  the 
Bank  of  France  conducts  regular  discounting  business 
with  all  the  regional  banks  and,  through  them,  with 
more  than  3,000  of  the  local  cooperative  rural  credit 
banks. 

Finally,  the  Bank  of  France  assists  agricultural  credit 
by  granting  large  sums  to  the  government  for  use  in 
financing  both  the  local  and  regional  rural  credit  banks. 
As  has  been  previously  stated,  when  the  charter  privileges 
of  the  bank  were  renewed  in  1897,  it  consented  to  ad- 
vance for  agricultural  credit  the  sum  of  $8,000,000  and 
to  make  an  annual  grant  in  proportion  to  its  profits  of  not 
less  than  $400,000  to  be  used  for  the  same  purpose.  Dur- 
ing the  first  16  years  that  this  arrangement  has  been  in 
operation,  the  Bank  of  France  has  turned  over  to  the 
government  for  rural  credit  the  sum  of  $18,000,000,  which, 
with  the  original  loan  of  $8,000,000,  makes  a  total  of 


Personal  Credit  55 

$26,000,000  advanced  by  the  Bank  of  France  for  agri- 
cultural credit  purposes. 

During  the  year  1913,  the  Bank  of  France  paid  over  to 
the  government  about  $2,800,000,  this  grant  being  in 
proportion  to  the  amount  of  business  transacted  by  the 
bank  in  that  year. 

It  is  to  be  clearly  understood,  however,  that  when  the 
government  advances  this  money  to  the  regional  banks, 
it  is  a  loan  and  not  a  gift.  The  loan  was  originally  made 
for  five  years,  but  on  the  request  of  the  regional  banks  it 
has  been  constantly  renewed  after  consultation  with  the 
proper  authorities.  But  the  renewal  has  always  been  made 
with  the  understanding  that  it  is  not  to  be  considered  by 
the  local  credit  banks  as  a  gift.  In  fact,  the  stipulation 
has  recently  been  made  that  the  local  banks  must  set 
aside  10  per  cent  every  year  out  of  their  profits  for  the 
ultimate  repayment  of  the  loans.  The  government  is 
granted  the  money  free  of  interest,  the  regional  banks  are 
granted  loans  on  the  same  terms,  while  the  regional 
banks  charge  the  local  banks  from  2  to  3  per  cent  interest. 
Individual  borrowers  pay  the  local  banks  from  2%  to 
33^  per  cent  interest  for  loans. 

Thus  the  French  system  of  personal  short-time  rural 
credit  is  intimately  related  to  the  Bank  of  France.  For 
only  farmers  can  be  members  of  an  agricultural  society; 
only  farmers  can  belong  to  a  local  rural  credit  bank;  only 
local  banks  can  form  regional  banks;  only  regional  banks 
can  join  the  federation  of  regional  banks;  and  only  mem- 
bers of  these  various  organizations  can  avail  themselves 
of  the  credit  which  the  Bank  of  France  has  placed  at  the 
command  of  the  government  for  rural  credit  purposes. 


56  Principles  of  Rural  Credits 

It  is  a  simple  but  an  effectual  plan,  in  that  it  has  brought 
about  notable  improvement  in  the  economic  and  social 
conditions  of  the  rural  population  of  France. 


GOVERNMENT  AID  FOR  COLLECTIVE  LONG-TIME  CREDIT 

In  France,  as  well  as  throughout  the  world,  agriculture 
is  becoming  more  and  more  industrialized,  and,  therefore, 
requires  a  long-time  credit.  The  main  purpose  of  this  form 
of  collective  credit  is  to  promote  the  prosperity  of  small 
farmers.  Under  a  system  of  industrial  agriculture,  small 
farmers  must  employ  collective  methods  in  order  to  place 
themselves  on  equal  terms  with  large  farmers  in  making 
purchases  of  necessary  supplies.  Only  by  cooperation  can 
small  farm  owners  expect  to  enjoy  the  same  advantages 
as  large  farmers.  Therefore,  long-time  collective  credit 
is  needed  to  complete  the  structure  of  an  agricultural 
credit  system  begun  by  short-time  credit. 

In  order  to  secure  for  small  farm  owners  the  possibility 
of  cooperation  in  making  purchases  of  their  requirements, 
the  French  government  undertook  to  provide  the  facilities 
by  which  they  could  secure  collective  long-time  credit. 
This  was  done  by  the  law  of  1906  which  authorized  the 
regional  banks  to  make  long-time  loans  to  cooperative 
societies  which  were  organized  for  the  purpose  of  purchas- 
ing supplies  or  for  the  production  and  distribution  of 
farm  products.  The  principles  underlying  this  law  are 
the  same  as  those  which  underly  the  laws  of  1896  and  1899. 
In  other  words,  the  government  stimulates  independent 
initiative,  but  does  not  replace  it. 

The  law  of  1906  defines  the  conditions  with  which  co- 


Personal  Credit  57 

operative  societies  must  comply  in  order  to  receive  recogni- 
tion and  be  entitled  to  enjoy  the  credit  facilities  offered. 
It  provides  that  long-time  credit  can  only  be  granted  to 
associations  for  the  production,  conservation,  or  marketing 
of  farm  products  actually  raised  by  their  members,  or  to 
associations  for  carrying  on  agricultural  enterprises  whose 
members  are  actively  engaged  in  farming.  The  rate  of 
interest  on  loans  cannot  exceed  4  per  cent  on  this  form 
of  credit,  and  dividends  must  not  be  distributed  on  capital, 
but  to  the  members  according  to  their  contributions  to 
the  societies  for  productive  purposes.  The  aim  is,  there- 
fore, to  encourage  pure  cooperative  societies  and  not 
joint-stock  companies. 

The  total  amount  of  credit  that  can  be  granted  to  these 
societies  is  fixed  by  law  at  one-third  of  the  sums  paid 
by  the  Bank  of  France  to  the  regional  banks  for  agri- 
cultural credit  purposes.  So  that  the  money  used  by  the 
government  for  this  form  of  rural  credit  is  primarily  sup- 
plied by  the  Bank  of  France. 

In  order  to  obtain  a  long-time  loan  under  this  method, 
a  cooperative  society  must  make  out  an  application  and 
submit  it  to  the  regional  bank;  the  latter,  in  turn,  trans- 
mits the  application  to  the  ministry  of  agriculture.  When 
such  application  is  received,  a  technical  inquiry  is  made  by 
the  ministry  of  agriculture  into  the  condition  of  the  society 
making  the  request  for  a  loan  in  order  to  determine  the 
needs  of  the  society.  The  authority  for  granting  long- 
time credit  of  this  nature  is  left  with  the  same  commission 
which  controls  the  grants  to  the  regional  banks.  The  com- 
mission will  allow  a  grant  only  after  being  fully  acquainted 
with  the  society's  needs,  and  it  will  only  grant  a  loan 


58  Principles  of  Rural  Credits 

then  on  the  condition  that  the  society  give  a  mortgage 
on  its  entire  property  and  secure  the  mortgage  on  the 
unlimited  liability  of  all  its  members. 

On  loans  made  to  cooperative  societies,  interest  varies 
from  13/2  to  2  per  cent.  This  favorable  rate  of  interest 
for  long-time  loans  is  granted  on  the  theory  that  the  pro- 
motion of  agriculture  means  the  promotion  of  national 
interests.  Agriculture,  it  is  contended,  is  more  heavily 
burdened  than  other  industries;  and,  in  order  to  prevent 
rural  depopulation  and  to  further  the  social  interests  of 
the  nation,  it  is  believed  by  the  French  government  that 
the  welfare  of  the  farming  population  cannot  be  too  well 
cared  for. 

Agricultural  cooperative  associations  existed  in  France 
before  the  law  of  1906  was  passed,  but  the  law  has  greatly 
promoted  their  development.  There  are  more  than  3,000 
cooperative  dairies,  but  only  about  300  of  them  have  re- 
ceived loans  under  the  law  for  a  total  credit  of  more  than 
$2,000,000.  These  dairying  societies  are  primarily  com- 
posed of  small  farmers  and  unite  in  their  membership 
about  75,000  farming  families.  It  rarely  happens  that  a 
farm  family  has  more  than  two  cows.  Government  aid 
for  cooperative  long-time  credit  in  France,  therefore,  is 
almost  wholly  devoted  to  promoting  the  interests  of  small 
landowning  farmers.  The  credit  is  granted  to  all  forms 
of  agricultural  cooperative  societies  which  are  willing  to 
comply  with  the  conditions  of  the  law. 

The  foregoing  summary  shows  that  European  farmers 
have  succeeded  in  providing  themselves  with  money  and 
credit  to  finance  their  operations  by  means  of  their  local 


Personal  Credit  59 

organizations;  and,  where  these  means  were  not  always 
sufficient  for  their  purposes,  they  have  been  aided  in  differ- 
ent ways  by  their  governments. 

Both  local  and  central  credit  banks,  as  well  as  the  supply 
associations,  are  the  fruits  of  the  modest  efforts  of  small 
landowning  farmers  in  Europe.  They  came  to  the  aid 
of  each  other  by  pledging  their  property  for  their  collective 
obligations,  and  then  they  laboriously  but  securely  built 
up  their  own  reserve  funds  to  protect  their  credit  and  to 
save  themselves  from  financial  loss  in  case  of  local  failures. 

The  keynote  of  their  success  was  confidence  in  each 
other  as  neighbors  and  in  their  farmers'  organizations. 
If  these  simple  principles  could  win  success  in  Europe, 
there  is  no  reason  why  they  cannot  be  made  to  succeed 
in  any  part  of  the  world  if  put  into  practice  by  organized 
landowning  farmers. 


CHAPTER  IV 

PERSONAL  CREDIT  FOR  THE  LANDLESS 

FARMER 

The  various  methods  of  financing  farmers  just  de- 
scribed relate  almost  entirely  to  landowners,  and  those 
methods  are  primarily  based  on  self-help  and  mutual  help. 
But  in  some  countries  the  landless  tenant  and  farm 
laborer  exceed  the  landowners  in  number,  and  they  are 
frequently  in  need  of  money  and  credit  in  order  to  pursue 
farming  profitably.  As  a  rule,  these  two  classes  of  farmers 
have  little  or  no  capital  as  a  basis  for  material  security 
which  is  required  of  members  in  mutual  rural  credit  banks. 
In  many  instances,  however,  they  are  admitted  as  mem- 
bers in  Raiffeisen  rural  credit  societies  and  are  granted 
credit  for  a  limited  time  and  amount.  Notwithstanding 
this  aid,  it  was  frequently  insufficient  to  meet  their  needs, 
and  many  tenant  farmers  and  farm  laborers  abandoned 
the  country  and  engaged  in  industrial  pursuits  in  the 
towns  and  cities. 

As  a  means  of  counteracting  this  tendency,  various 
governments  undertook  to  establish  better  living  and 
working  conditions  for  the  landless  farmer.  Where 
government  credit  has  been  granted,  it  has  generally  been 
in  behalf  of  these  classes.  One  of  the  chief  objects  in 
these  endeavors  has  been  to  repopulate  rural  districts 
by  encouraging  land  ownership  on  the  part  of  those  who 

60 


Personal  Credit  61 

were  practically  without  capital  or  credit,  but  who  were 
desirous  of  taking  up  farming  as  a  means  of  earning  a 
living.  The  character  of  the  borrower  rather  than  his 
possessions  became  the  basis  of  granting  him  a  loan  even 
when  the  purchase  of  a  farm  was  at  stake. 

The  problem  of  furnishing  credit  to  the  tenant  and  farm 
laborer  is  much  the  same  the  world  over.  Where  security 
for  a  loan  of  a  material  nature  is  lacking,  reliance  must 
be  placed  on  the  moral  character  of  the  borrower  if  the 
average  tenant  and  farm  laborer  are  to  be  financed  at  all. 

SELF-HELP   AND    MUTUAL   HELP 

There  are  many  reasons  for  encouraging  the  man  pos- 
sessing a  reputation  for  honesty,  sobriety,  strength  of 
muscle,  industry  and  intelligence  to  continue  as  a  tiller 
of  the  soil.  The  future  success  of  agriculture  will  depend 
largely  upon  the  development  of  this  type  of  farmer.  The 
primary  form  of  credit  for  these  classes  of  the  rural  popula- 
tion is  to  be  furnished  with  a  piece  of  land,  however  small, 
which  some  day  may  become  their  own  property.  That 
is  an  inducement  which  is  very  alluring  to  the  average 
farm  tenant  or  laborer,  and  this  is  clearly  recognized  by 
those  who  advocate  either  mutual  aid  or  government  aid 
in  their  behalf. 

As  between  landowner  and  tenant,  the  former  is  the 
most  natural  source  of  credit  for  the  tenant  farmer.  The 
owner's  land  is  his  property  and  it  is  to  his  interest  to 
conserve  his  property  value  with  its  use.  But  he  rents 
his  land  to  a  tenant.  Without  proper  control,  a  tenant 
may  abuse  his  privilege  in  the  use  of  the  land  and  exploit 
its  fertility  as  much  as  possible.    If  a  tenant  fails  to  make 


62  Principles  of  Rural  Credits 

an  intelligent  use  of  the  land,  both  he  and  the  landlord 
will  be  worse  off  financially  in  the  long  run  because  of  this 
depletion  of  soil  fertility  which  is  bound  to  result  in  a 
decrease  in  yield  of  crops  with  the  same  amount  of  labor. 
On  the  share  system  of  renting  farms  which  prevails  to  a 
large  extent  in  Europe,  a  diminished  yield  means  less 
crops  to  be  divided  and,  therefore,  poorer  returns  for  both 
parties  to  the  contract. 

While  many  of  the  local  rural  banks  admit  as  members 
both  tenants  and  farm  laborers,  by  far  the  larger  number 
own  land,  chattels,  or  other  property  as  material  assets. 
If  this  were  not  the  case,  the  principle  of  unlimited  liability 
would  have  no  significance.  It  is  the  pledge  of  their 
property  for  the  debts  of  the  society  which  forms  the 
basis  of  collective  credit.  But,  by  the  aid  of  these  local 
rural  banks,  some  of  these  farm  laborers  have  been  trans- 
formed into  tenants  because  they  have  been  granted  credit 
on  the  basis  of  their  honesty,  industry,  and  general  good 
character;  while  some  tenants  have  become  landowners 
for  precisely  the  same  reason.  In  some  parts  of  Italy 
the  tenant  membership  of  some  rural  credit  banks  out- 
numbers the  landowners  three  to  one.  This,  however,  is 
exceptional  and  it  is  due  largely  to  the  fact  that  Italy  is 
characteristically  an  agricultural  country  with  a  large  land- 
less population.  The  credit  problems  for  tenants  and  farm 
laborers  have  been  worked  out  there  under  conditions  not 
comparable  with  those  prevailing  in  many  other  countries. 

TENANT  FARMING   IN   ITALY 

As  is  well  known,  farm  tenancy  is  usually  based  on 
some  system  of  crop  sharing.    Not  only  does  this  plan 


Personal  Credit  63 

provide  the  necessary  capital  and  credit  for  carrying  on 
farming,  but  it  also  serves  to  conciliate  the  conflicting 
interests  of  capital  and  labor.  Many  of  the  large  estates  in 
Tuscany  are  divided  up  into  separate  farms  ranging  in 
size  from  7J^  to  50  acres.  Each  of  these  farms  is  worked 
by  a  farming  family  in  number  proportionate  to  the  size 
and  needs  of  the  work  on  the  farm. 

These  farming  families  undertake  the  entire  cultiva- 
tion of  the  farm,  the  landowner  placing  them  in  possession 
of  the  means  of  doing  so  by  furnishing  housing  and  stabling 
accommodations,  implements,  live  stock,  and  the  feed 
necessary  for  the  working  stock.  Thus,  in  addition  to  the 
land,  all  the  required  capital  stock  is  supplied  to  each 
farming  family  by  the  owner.  All  expenses  for  seeds, 
fertilizers,  feed  for  fattening  market  cattle,  and  so  on, 
are  divided  equally  between  tenant  and  landowner.  If  the 
tenant  family  is  without  money,  the  landowner  usually 
provides  what  is  necessary  for  the  purchase  of  supplies 
without  charging  interest.  Moreover,  in  seasons  of  partial 
crop  failures,  there  is  an  arrangement  provided  for  in  the 
lease  whereby,  if  the  farmer's  share  is  insufficient  to  cover 
his  current  year's  expenses,  the  proprietor  advances  the 
tenant  money  to  keep  the  farm  going  on  which  no  interest 
is  charged,  the  loan  only  being  repaid  in  more  profitable 
years. 

In  case  of  illness  or  death  in  a  tenant  family  which 
necessitates  the  engaging  of  hired  labor,  the  landowner 
sometimes  advances  the  cost  of  this  labor  as  a  means  of 
helping  the  tenant. 

The  lease  made  with  the  farmers  prescribes  the  rotation 
of  crops.    In  this  way  the  landowner  has  a  general  super- 


64  Principles  of  Rural  Credits 

vision  over  the  separate  farms.  Owners  of  very  large 
estates,  comprising  not  less  than  40  farms,  usually  employ 
an  agent  whose  duty  it  is  to  inspect  the  farms  and  to  see 
that  the  terms  of  the  lease  are  respected  by  the  tenants. 
The  crops  raised  are  divided  equally  at  the  end  of  the 
season  when  settlements  are  made,  as  well  as  the  profits 
from  the  raising  of  market  cattle.  The  agent  represents 
the  landowner  at  the  division  of  crops,  has  charge  of  the 
purchase  of  live  stock,  and  acts  in  the  place  of  the  owner 
in  all  transactions. 

This  system  provides  for  the  employment  of  farming 
families  all  the  year  round,  gives  the  tenant  opportunities 
for  accumulating  a  surplus  with  which  he  is  sometimes 
enabled  to  purchase  a  farm  of  his  own,  and  has  established 
a  real  copartnership  between  landowner  and  tenant  since 
both  are  equally  interested  in  the  prosperity  of  the  farm. 
By  this  system  the  need  for  short-time  personal  credit 
is  less  felt  by  tenants  than  it  is  by  small  farm  owners. 
Where  a  landowner  has  30  or  40  farms  run  in  this  way,  he 
is  frequently  in  need  of  credit  but  in  larger  amount  than 
is  supplied  by  small  rural  banks.  He  undertakes  to  provide 
the  money  by  borrowing  when  necessary  at  some  larger 
bank,  while  he  becomes  the  creditor  of  his  various  tenants. 
The  need  for  small  rural  banks  of  the  Raiffeisen  type  is  not 
much  felt  in  those  parts  of  Italy  where  this  crop-sharing 
plan  largely  prevails. 

When  tenants  belong  to  local  credit  societies  and  are 
desirous  of  obtaining  a  loan,  the  society  protects  itself 
by  taking  a  lien  on  the  tenant's  prospective  share  in  the 
crops.  But,  under  these  circumstances,  the  tenant  must 
first  obtain  a  written  declaration  from  his  landlord  recog- 


Personal  Credit  65 

nizing  the  credit  which  the  society  is  about  to  grant  and 
acknowledging  that  he  has  no  prior  claim  against  the 
tenant's  portion  of  the  crops. 

COLLECTIVE  FARMING  BY  FARM  LABORERS 

The  most  difficult  phase  of  the  problem  of  personal 
credit  relates  to  the  farm  laborer  who  has  no  material 
assets  to  offer  as  security  for  a  loan.  The  value  of  the 
farm  laborer's  services  has  long  been  recognized  in  various 
countries.  The  demand  for  these  services,  however,  is  not 
constant,  being  more  pressing  at  seeding  and  harvesting 
times.  These  busy  seasons  are  frequently  followed  by 
periods  of  only  partial  employment  or  total  unemployment. 

Two  methods  of  overcoming  this  lack  of  employment 
have  been  put  into  practice,  one  on  the  basis  of  mutual 
help  and  the  other  by  means  of  government  aid.  Farm 
laborers  in  some  countries  have  cooperated  to  rent  land 
on  a  collective  lease,  and  this  method  has  been  so  fruitful 
of  both  economic  and  social  benefits  that  it  is  worthy  of  a 
brief  description. 

The  collective  leasing  of  land  by  farm  laborers  originated 
in  Italy  about  25  years  ago.  It  began  in  Lombardy  in 
order  to  replace  the  capitalistic  middlemen  who  used  to 
lease  estates  from  large  landowners  and  then  sublet  them 
to  farmers  in  small  holdings.  The  farm  laborers  believed 
they  could  make  better  terms  by  leasing  directly  from  the 
landowners. 

There  are  two  kinds  of  these  cooperative  farming  asso- 
ciations, one  for  separate  and  the  other  for  collective 
cultivation.  The  first  kind  prevails  in  the  Province  of 
Milan  and  in  Sicily,  the  land  being  leased  collectively 


66  Principles  of  Rural  Credits 

to  the  association  and  then  parceled  out  into  lots  which 
are  farmed  separately  by  each  family.  In  the  other  kind, 
which  predominates  in  Emilia,  the  land  is  leased  and 
farmed  collectively  under  central  technical  and  adminis- 
trative direction.  In  some  instances  these  associations 
make  a  contract  to  cultivate  land  on  some  crop-sharing  sys- 
tem, receiving  as  a  rule  one-half  or  one-third  of  the  crop. 

From  the  social  point  of  view,  the  cooperative  farms, 
in  which  each  family  is  assigned  its  own  plot  of  land  to 
cultivate,  have  given  the  best  results;  but  collective 
cultivation  holds  the  first  place  for  intensity  of  cultivation 
and  the  perfection  of  its  technical  methods.  In  the  latter 
plan  each  member  works  in  turn,  the  work  to  be  done  being 
divided  among  the  members  who  are  nearly  always  more 
numerous  than  the  enterprise  requires.  This  system  of 
collective  farming  is  an  interesting  attempt  to  lessen 
unemployment  in  those  regions  of  Italy  where  farm  la- 
borers are  very  numerous. 

The  importance  of  this  form  of  cooperation  and  mutual 
credit  is  greater  in  the  Province  of  Emilia,  because  in  that 
district  the  population  consisted  mostly  of  landless  farm 
laborers  who  went  out  at  a  daily  wage  to  work  on  neigh- 
boring farms.  This  class  of  rural  workers  was  subject  to 
long  periods  of  unemployment.  As  a  consequence,  strikes 
and  serious  labor  troubles  arose  which  were  due  to  the 
discontent  of  the  farm  laborers.  The  formation  of  the 
collective  farming  associations,  however,  served  to  calm 
the  labor  troubles  in  this  district  and  also  aided  in  pro- 
ducing greater  yields  from  the  land.  These  associations, 
therefore,  raised  the  standard  of  agriculture  as  well  as 
the  economic  and  social  status  of  their  members. 


Personal  Credit  67 

The  necessary  capital  for  running  the  collective  farms 
is  nearly  always  obtained  through  loans.  In  southern 
Italy  these  loans  are  secured  from  the  special  agricultural 
credit  institutes,  and  in  northern  Italy  they  are  obtained 
from  cooperative  credit  banks,  regular  banks,  private 
capitalists,  buyers  of  farm  products  who  advance  money 
on  the  anticipated  crop  returns,  or  from  the  members 
themselves  who  postpone  the  withdrawal  of  money  due  as 
wages.  Intermediate  institutions  for  the  administration  of 
credit  under  special  acts  or  as  autonomous  deposit  and  loan 
banks  have  been  organized  by  these  farming  associations. 

In  addition  to  providing  capital,  the  societies  conduct 
other  supplementary  business  for  the  benefit  of  members, 
such  as  the  collective  ownership  and  working  of  machines, 
collective  purchase  of  supplies  and  sale  of  produce,  co- 
operative dairies,  and  cattle  insurance.  Moreover,  they 
are  striving  to  accomplish  certain  educational  and  moral 
work  in  behalf  of  their  members  through  the  establish- 
ment of  special  schools,  infant  asylums,  and  short  lecture 
courses  on  agriculture  and  general  education. 

In  Sicily  the  tendency  is  constantly  to  enlarge  the  area 
of  the  cooperative  farms,  and  not  only  to  lease  but  to 
purchase  the  land.  In  central  Italy,  where  great  diffi- 
culties have  arisen  from  so-called  "  civic  usages,"  and  in 
the  district  of  Padua  which  was  constantly  subject  to 
agricultural  strikes  on  the  part  of  the  laborers,  the  tend- 
ency now  is  to  adopt  this  collective  farming  system  and 
obtain  the  land  either  by  lease  or  by  purchase.  In  the 
Province  of  Ferrara  the  tendencies  are  toward  collective 
leasing  or  purchasing  the  land  and  cooperative  crop- 
sharing  farming.    In  the  latter  case  land  is  obtained  from 


68  Principles  of  Rural  Credits 

landowners  and  a  copartnership  agreement  is  entered  into 
whereby  the  crops  and  the  profits  of  the  enterprise  are 
shared.  These  cooperative  farming  associations  have 
appealed  to  the  government  to  induce  it  to  pass  legislative 
measures  to  provide  them  with  better  credit  facilities  and 
technical  guidance  in  agriculture. 

The  latest  data  with  reference  to  these  cooperative 
farming  associations  in  Italy  show  that  in  1912  there 
were  152  societies  with  a  membership  of  35,360.  They 
operated  143,750  acres  at  a  rental  of  $635,140. 

The  governments  of  Hungary,  Russia  and  Roumania 
have  sent  commissions  to  Italy  to  study  these  cooperative 
farming  systems  by  farm  laborers  with  a  view  to  adapting 
them  to  meet  the  special  needs  of  the  landless  farmers  in 
those  countries.  Hungary  has  introduced  the  system 
and  already  11  associations  of  farm  laborers  have  been 
organized.  These  have  already  leased  and  are  operating 
nearly  18,000  acres  of  farm  lands.  Roumania  has  also 
passed  special  laws  which  enable  the  farm  laborers  to 
lease  or  otherwise  acquire  lands  to  be  worked  under  this 
system  of  cooperative  farming. 

In  southern  Italy,  where  great  land-reclamation  works 
are  necessary,  efforts  are  now  being  made  to  form  coopera- 
tive associations  of  farm  laborers  for  the  purpose  of  first 
reclaiming  the  land  and  afterwards  farming  it  on  the  col- 
lective method.     . 

The  results  of  the  work  of  these  cooperative  farms  are 
that  they  have  contributed  to  real  progress  in  agricultural 
methods  among  those  who  need  it  most,  have  stimulated 
the  sense  of  responsibility  among  their  members,  have 
given  them  more  exact  knowledge  on  the  cost  of  pro- 


Personal  Credit  69 

during  agricultural  products,  and  have  taught  them  how 
to  acquire  and  use  personal  credit. 

HOW  DENMARK  AIDS   FARM   LABORERS 

But  many  governments  have  also  come  to  the  aid  of  the 
small  tenant  farmer  and  the  farm  laborer  by  providing 
the  means  of  obtaining  loans.  As  an  encouragement  to 
rural  repopulation,  Denmark  early  undertook  a  system 
of  granting  credit  to  small  holders. 

This  plan  was  begun  in  1899  as  an  experiment  to  be 
continued  five  years.  It  proved  so  successful  that  it  has 
been  continued  ever  since.  The  government  first  placed 
at  the  disposal  of  the  people  who  desired  to  start  small 
farms  the  sum  of  $500,000  which  could  be  had  in  loans  at 
3  per  cent  interest.  This  sum  has  now  been  increased  to 
more  than  $1,000,000  a  year. 

Only  farm  laborers  or  very  small  farmers  can  take  ad- 
vantage of  this  government  credit.  The  borrower  has 
to  fulfill  certain  obligations  in  order  to  secure  a  loan,  since 
the  government  wants  to  be  assured  that  the  money  will 
be  expended  for  the  purposes  intended  in  granting  the 
loan.  The  aim  is  to  assist  the  small  farmer  or  farm  laborer, 
who  had  previously  worked  for  other  farmers,  to  establish 
his  own  farm,  build  his  own  home,  and  become  an  in- 
dependent landowner.  Therefore,  the  law  provides  that 
those  who  have  worked  at  least  four  years  for  other  farmers 
can  make  application  for  a  loan.  The  amount  of  loan 
the  government  grants  is  90  per  cent  of  the  valuation  of 
the  property.  This  is  much  higher  than  is  granted  by 
the  credit  associations  which  is  usually  50  per  cent  of  the 
valuation. 


70  Principles  of  Rural  Credits 

When  an  application  for  a  loan  is  made,  the  prospective 
borrower  has  to  file  with  it  a  declaration  from  the  head  of 
the  community  where  he  resides  regarding  the  nature  of 
the  land  sought  for  cultivation.  The  borrower  also  makes 
affidavit  that  he  is  a  sober,  industrious  and  economical 
worker.  Unless  these  preliminary  conditions  are  fulfilled, 
the  application  for  a  loan  will  not  be  considered.  Each 
county  has  a  commission  that  first  investigates  the  appli- 
cation; if  the  application  is  later  approved,  the  county 
commission  also  dictates  how  the  money  shall  be  ex- 
pended. 

During  the  time  this  law  has  been  in  force,  about  6,000 
small  farms  have  been  established,  and  very  few  farms 
have  been  taken  over  by  the  government  as  a  result  of 
the  borrowers  not  fulfilling  their  obligations. 

Farms  established  under  government  credit  must  be 
occupied  individually.  The  land  cannot  be  cultivated 
in  a  cooperative  way.  The  nominal  owner  may  sell  his 
farm,  but  it  must  be  continued  as  a  small  farm.  If  sold 
to  someone  else,  the  new  owner  may  continue  the  govern- 
ment loan  if  his  qualifications  are  such  that  he  would  have 
been  granted  the  loan  had  he  himself  originally  applied 
for  it. 

The  loans  the  government  has  granted  for  this  purpose 
now  amount  to  nearly  $6,500,000;  and  up  to  the  close 
of  1912  the  losses  by  the  Danish  government  have  been 
about  $2,500  only. 

HOW    FRANCE   AIDS   FARM   LABORERS 

The  French  government  has  also  provided  a  means  of 
furnishing  credit  to  farm  laborers.    This  is  known  as  long- 


Personal  Credit  71 

time  personal  credit  which  was  established  by  the  law  of 
1910. 

The  purpose  of  the  law  is  to  attach  the  peasant  farmer 
to  the  land,  so  that  loans  are  only  made  in  behalf  of  small 
holdings.  The  amount  of  a  long-time  personal  loan  can- 
not exceed  $1,600,  and  the  maximum  period  for  which  a 
loan  may  run  is  15  years.  Loans  are  only  allowed  in  the 
case  of  young  farmers.  The  object  is  to  encourage  young 
men  who  have  finished  their  military  service  to  take  up 
a  small  farm  and  to  assist  peasant  farmers  without  money 
to  purchase  small  holdings. 

This  form  of  government  credit  is  granted  by  the  local 
credit  banks.  The  borrower  may  or  may  not  be  a  member 
of  his  local  society.  The  young  man's  character  becomes 
the  basis  of  his  credit  for  this  purpose.  The  government 
advances  the  money  to  the  local  credit  bank  through  a 
central  or  regional  bank,  of  which  there  are  one  hundred  in 
France,  the  funds  being  under  the  control  of  the  Bank  of 
France  for  the  sole  purpose  of  promoting  agricultural 
credit  among  the  landless  tenants  and  farm  laborers. 

Credit  under  this  sytem  may  also  be  granted  to  small 
holders  for  the  purpose  of  transforming  a  farm;  for  in- 
stance, from  a  cultivated  to  a  grazing  farm.  It  may  also 
be  granted  for  reconstructing  a  farm;  that  is,  if  a  farm  has 
been  ruined  by  flood,  a  loan  will  be  granted  for  its  recon- 
struction. 

These  long-time  personal  loans  are  payable  on  the 
amortization  plan — that  is,  by  the  payment  of  the  interest 
and  part  of  the  principal  each  year  so  that  the  debt  is  paid 
off  before  or  at  the  end  of  the  designated  time.  The 
amount  to  be  paid  each  year  is  fixed  at  the  option  of  the 


72  Principles  of  Rural  Credits 

borrower.  As  a  rule  the  rate  of  interest  on  these  loans  is 
2  per  cent.  The  security  may  be  of  several  kinds,  of  which 
the  most  common  are  personal  indorsement,  life  insurance 
policies,  and  a  mortgage  on  the  farm. 

For  the  first  two  years  after  the  law  became  effective 
more  than  $2,400,000  had  been  loaned  under  this  system 
of  long-time  personal  credit.  Having  already  proved  a 
success,  this  law  is  expected  to  give  better  results  in  the 
future  and  to  be  a  powerful  influence  in  establishing  and 
maintaining  small  peasant  farms  in  France. 

HOW    GREAT   BRITAIN    AIDS    FARM    LABORERS 

During  the  past  six  years,  the  British  government  has 
been  doing  a  great  deal  to  encourage  the  development 
of  small  holdings  and  garden  plots  among  tenants  and 
farm  laborers.  In  1907,  the  Small  Holdings  and  Allot- 
ments Act  was  passed  to  take  effect  on  January  1,  1908. 
This  law  conferred  authority  on  county  councils  in  Eng- 
land and  Wales  and  the  commissioners  of  the  Board  of 
Agriculture  and  Fisheries  to  acquire  lands,  either  freely  or 
compulsorily,  for  the  use  of  small  holdings.  Before  this 
law  was  passed,  it  was  very  difficult  for  the  tenant  farmer 
or  farm  laborer  to  become  an  independent  landowner  be- 
cause of  the  hereditary  system  of  land  holding  in  the 
British  Isles.  But,  under  the  provisions  of  this  law,  a 
summary  of  the  report  for  1913  shows  that  the  total  quan- 
tity of  land  acquired  for  small  holdings  to  the  close  of 
1913  was  182,022  acres.  Of  this  amount  125,971  acres 
have  been  purchased  for  about  $20,500,000,  and  56,051 
acres  leased  at  rentals  of  about  $340,000. 

Of  this  land,  157,883  acres  had  been  actually  rented  by 


Personal  Credit  73 

county  councils  to  11,021  small  holders,  and  476  acres 
sold  to  42  small  farmers,  while  the  councils  of  county 
boroughs  have  rented  994  acres  to  209  tenants.  In  ad- 
dition, 8,037  acres  have  been  rented  to  61  cooperative 
small  holdings  societies.  These  associations  become  re- 
sponsible for  the  rents,  but  they  subrented  the  land  to 
1,424  of  their  members  during  the  past  six  years.  More- 
over, 3,314  tenants  have  been  provided  with  more  than 
44,000  acres  by  private  landowners.  The  land  acquired 
but  not  yet  allotted  to  tenants  amounts  to  14,955  acres, 
and  it  is  estimated  that  this  will  provide  holdings  for  917 
more  applicants  and  1  cooperative  association.  The  law, 
therefore,  has  made  provision  to  supply  tenants  and  labor- 
ers with  more  than  17,000  small  holdings  in  six  years. 
About  2  per  cent  of  the  applicants  express  a  desire  to 
purchase  rather  than  to  rent  holdings. 

The  number  of  applicants  in  1913  described  as  agricul- 
tural laborers  was  988,  which  was  nearly  24  per  cent  of  the 
total  number.  This  is  a  smaller  proportion  than  was  the 
case  in  previous  years,  but  the  figures  can  only  be  regarded 
as  an  approximate  estimate  because  the  classification  is 
not  very  exact.  In  the  larger  number  of  cases,  it  appears 
that  farm  laborers  who  are  regularly  employed  have 
neither  the  time  nor  the  capital  to  cultivate  a  small  holding 
of  several  acres,  so  that  the  needs  of  this  class  have  been 
more  successfully  met  by  providing  small  garden  plots 
which  they  can  cultivate  in  their  spare  time.  The  aim  is 
to  increase  their  income.  On  the  other  hand,  the  larger 
number  of  applicants  for  small  holdings  are  either  tenants 
or  landowners  who  want  to  increase  the  size  of  their 
holdings,  or  men  who  have  some  other  calling  which  does 


74  Principles  of  Rural  Credits 

not  take  up  all  their  time.  At  the  present  time  there  is  an 
unsatisfied  demand  for  holdings  by  6,271  approved  appli- 
cants for  which  it  is  estimated  that  about  90,000  acres 
will  be  required. 

The  Board  of  Agriculture  and  Fisheries  made  inquiries 
in  1913  as  to  whether  or  not  the  rents  for  small  holdings 
had  been  paid  punctually.  With  few  exceptions  the  replies 
were  in  the  affirmative.  Many  of  the  county  councils 
have  large  areas  of  rented  land  under  their  management, 
and  it  is  not  at  all  unusual  that  there  should  be  some 
arrears  especially  in  view  of  the  fact  that  it  is  customary 
with  agricultural  tenancies  in  England  and  Wales  not 
to  require  payment  for  one  or  two  months  after  rents  are 
due.  Taking  the  country  as  a  whole,  the  amount  of  arrears 
regarded  as  not  recoverable  is  quite  negligible. 

The  number  of  tenants  in  1913  who  were  served  by  the 
councils  with  notice  to  quit  was  90  in  England  and  none 
in  Wales.  This  represents  a  proportion  of  unsatisfactory 
tenants  of  less  than  1  per  cent.  In  addition,  174  tenants 
in  England  and  9  in  Wales  voluntarily  gave  up  their 
farm  holdings,  but  in  some  of  these  cases  it  was  for  the 
purpose  of  removing  to  larger  farms. 

The  foregoing  review  of  the  ways  adopted  by  European 
farmers  to  provide  themselves  with  personal  credit,  as 
well  as  the  methods  of  supplying  government  aid,  shows 
that  there  is  nothing  mysterious  about  these  rural  credit 
features.  Farmers  of  a  given  district,  with  little  or  no 
ready  money,  cooperate  together  as  an  organized  body  to 
provide  and  protect  a  collective  credit.  When  a  govern- 
ment comes  to  the  aid  of  unorganized  and  landless  tenants 


Personal  Credit  75 

and  farm  laborers,  it  does  so  not  in  a  spirit  of  charity, 
but  on  a  strictly  business  basis.  By  these  means  farmers 
are  enabled  to  secure  money  and  supplies  for  productive 
purposes  when  most  needed,  and  these  ends  are  attained 
(1)  without  loss  of  time,  (2)  at  a  reasonable  rate  of  interest, 
(3)  for  either  a  long  or  short  time,  (4)  with  the  assurance 
of  not  having  to  pay  before  the  loan  falls  due,  and  (5)  with 
facilities  for  payment  in  small  installments.  By  means 
of  organization,  farmers  are  also  aided  to  procure  the  best 
grades  of  necessary  farm  supplies  and  machinery,  for  cash 
or  on  credit,  at  a  small  advance  over  the  regular  whole- 
sale prices. 

The  principles  governing  the  activities  of  these  farmers 
through  their  local  rural  banks  are  the  ordinary  methods 
of  banking  and  business  conducted  with  extreme  care, 
frugality,  and  honesty.  The  natural  consequences  are  that 
there  have  been  few  bank  failures  and  practically  no  losses 
to  the  members  of  these  banks,  though  they  have  existed 
in  some  countries  for  upwards  of  half  a  century.  On  the 
other  hand,  the  farmers  themselves  have  received  educa- 
tional, moral  and  material  benefits  which  have  greatly 
surpassed  the  expectations  of  the  most  sanguine  exponents 
of  self-help,  mutual  help,  or  government  aid  in  behalf  of 
personal  rural  credit. 


CHAPTER  V 

COOPERATIVE  FARM  MORTGAGE  OR  LONG- 
TIME CREDIT 

As  previously  described,  personal  credit  is  desired 
largely  to  meet  the  current  financial  needs  of  farmers. 
Money  is  required  to  finance  operations  on  a  farm  during 
the  time  crops  are  being  raised  or  live  stock  are  being 
fattened  for  market.  This  is  called  short-time  credit 
because  the  length  of  time  for  which  loans  are  granted  on 
personal  security  seldom  exceeds  six  months  or  one  year. 

For  special  purposes  like  the  raising  of  cattle,  which 
takes  much  more  time  than  it  does  to  grow  a  staple  farm 
crop,  the  period  of  a  loan  may  be  extended  to  three  years, 
and  this  would  still  be  regarded  as  short-time  credit. 

BASIS   OF   MORTGAGE   CREDIT 

Where  government  credit  is  granted  for  the  purchase 
of  a  farm,  the  period  of  a  loan  may  run  from  ten  to  fifteen 
years;  and  while  such  a  loan  would  be  granted  on  the 
personal  responsibility  of  the  borrower,  the  government 
protects  itself  by  taking  a  mortgage  on  the  farm  as  the  se- 
curity for  the  loan.  In  other  words,  the  government  prac- 
tically purchases  or  becomes  responsible  for  a  farm  and 
turns  it  over  to  a  farmer  without  capital  on  credit.  The 
tenant  and  farm  laborer  have  been  the  recipients  of  land 
credit  of  this  kind  to  a  large  extent.    It  is  evident,  however, 

76 


Long-time  Credit  77 

that  the  line  between  short-time  and  long-time  credit 
cannot  always  be  sharply  drawn. 

With  a  great  many  farmers,  ownership  is  only  partial. 
The  farms  have  either  been  bought  on  time  by  the  pay- 
ment of  part  of  the  purchase  price  only,  or  money  has 
been  borrowed  to  meet  a  farmer's  capital  requirements 
for  farm  improvements  such  as  erecting  or  reconstructing 
barns,  silos,  or  other  buildings,  for  draining,  clearing  or 
irrigating  the  land,  for  the  erection  of  fences  or  the  making 
of  roads,  or  for  otherwise  equipping  the  farm  so  as  to 
bring  his  operations  to  the  highest  state  of  improvement, 
efficiency,  and  profitableness.  In  such  cases  the  property 
itself  is  made  the  direct  security  for  borrowed  capital,  and 
a  mortgage  is  given  on  the  farm  to  cover  the  amount  of 
the  indebtedness.  The  length  of  time  the  mortgage  is 
made  to  run  varies  with  the  amount  of  the  loan  and  the 
inclination  of  the  lender.  This  is  known  as  farm  mortgage 
or  long-time  credit. 

For  such  improvements  on  farm  property,  much  more 
capital  is  usually  needed  than  is  the  case  when  ordinary 
current  expenses  are  to  be  met  by  personal  security,  as 
well  as  a  longer  period  of  time  for  the  repayment  of  the 
loan.  Consequently,  the  money  needed  for  mortgage 
purposes  must  be  regarded  as  more  or  less  of  a  long-time 
investment  because  the  average  farmer  anticipates  that 
he  will  only  be  able  to  pay  off  his  mortgage  gradually 
out  of  the  increased  earnings  derived  from  the  improve- 
ments or  equipment  added  to  his  farm. 

From  the  financial  point  of  view,  the  difficulties  about 
mortgage  credit  as  compared  with  personal  credit  relate 
to  the  amount  of  the  loan  and  the  length  of  time  involved. 


78  Principles  of  Rural  Credits 

Loans  on  mortgage  are  necessarily  for  larger  amounts  than 
loans  on  personal  security.  The  holder  of  a  mortgage 
cannot  readily  dispose  of  it  on  the  market  in  case  of  need. 
But  if,  in  the  place  of  a  single  mortgage,  notes,  debentures 
or  bonds  to  its  face  value  are  issued  and  the  mortgage 
itself  is  held  by  a  firm  or  institution  issuing  the  notes  or 
bonds  as  security,  'then  a  hundred  investors  may  be  found 
who  would  each  be  willing  to  take  a  part  of  the  subsidiary 
paper  as  an  investment  and  feel  perfectly  secure  in  doing 
so.  For  the  mortgage  becomes  the  security  for  the  paper 
as  the  farm  itself  is  the  security  for  the  mortgage.  In  this 
way  farm  mortgage  notes  or  bonds  could  more  easily  be 
sold  on  the  money  market  than  the  mortgage  itself. 

If  a  mortgage  is  made  to  run  for  10,  15  or  20  years,  with 
interest  payable  annually  or  semi-annually,  the  holder  of 
a  mortgage  may  find  himself  at  the  end  of  the  period  with  a 
farm  on  his  hands  rather  than  his  money  because  the 
borrower  was  not  able  to  pay  down  the  whole  amount  of 
the  mortgage  at  that  time. 

To  avoid  this  difficulty,  payment  of  part  of  the  principal 
each  year  to  reduce  the  debt  has  been  conceived  as  a  work- 
able plan  to  give  greater  assurance  to  the  creditor  and  to 
furnish  a  measure  of  relief  to  the  debtor. 

These  are  the  methods  briefly  set  forth  which  European 
farmers  have  worked  out  in  order  that  they  may  use  their 
land  most  advantageously  as  the  basis  of  their  credit. 
Mortgage  institutions  have  been  organized  under  authority 
of  law  in  practically  all  European  countries,  but  no  uni- 
formity of  type  exists  as  to  method  of  organization  or  de- 
tail of  operation.  Nevertheless,  a  review  of  these  methods 
and  details  will  be  valuable  as  an  aid  in  determining 


Long-time  Credit  79 

their  application   to   farm   mortgage  conditions   in   the 
United  States  and  Canada. 

FARM   MORTGAGE  MUTUAL   CREDIT  ASSOCIATIONS 

Organized  farm  mortgage  credit  began  in  Prussia  among 
the  great  landowning  nobility  in  the  reign  of  Frederick 
the  Great.  The  owners  of  large  estates,  when  in  need  of 
money,  were  frequently  unable  to  borrow  it  on  mortgage 
without  paying  exorbitant  rates  of  interest.  This  made 
borrowing  on  farm  mortgage  very  difficult  and  burden- 
some. As  a  means  of  relief,  there  was  established  what 
is  known  as  the  "Landschaft,"  or  an  association  of  land- 
owners to  borrow  money  on  mortgage. 

The  establishment  of  this  farm  mortgage  credit  system 
is  due  to  the  untiring  efforts  of  Biiring,  a  Berlin  merchant. 
In  1767  he  proposed  to  the  King  of  Prussia  the  establish- 
ment of  a  loan  system  for  the  landowning  aristocracy. 

The  idea  underlying  Biiring's  project  was  to  free  the 
large  landowner  from  the  necessity  of  raising  money  on 
mortgage  directly  by  the  creation  of  an  organization 
which  would  undertake  this  task  for  all  the  landed  pro- 
prietors of  a  particular  district.  This  was  the  origin  and 
purpose  of  the  farm  mortgage  mutual  credit  associations. 

The  fundamental  idea  of  this  system  consists  in  re- 
placing the  single  mortgage  on  an  estate,  where  creditor 
and  debtor  must  meet  together  and  personally  transact 
their  business,  by  an  institution  that  undertakes  for  the 
landowners  of  a  district  to  act  as  intermediary  between 
owners  of  farms  seeking  credit  and  owners  of  money  seek- 
ing investment.  By  means  of  the  combined  credit  of 
landed  proprietors,  such  an  association  offers  a  far  better 


80  Principles  of  Rural  Credits 

security  than  the  ordinary  mortgage.  Moreover,  a  further 
object  was  to  be  able  to  realize  money  on  this  collective 
security  without  the  customary  delay  and  high  rates  of 
interest  that  the  single  landowner  encountered  when  he 
tried  to  borrow  money  on  mortgage. 

i  These  societies  of  large  landowners  are  corporations 
which  receive  a  charter  from  the  king.  They  are  under 
state  supervision  which  is  regularly  exercised  by  a  spe- 
cially appointed  royal  commissioner  and  by  the  minister 
of  agriculture.  Within  the  limits  prescribed  by  the  govern- 
ment, the  mortgage  credit  associations  manage  their  own 
affairs  as  self-governing  corporations.  The  employees 
have  the  standing  of  state  officials.  The  ordinary  business 
is  carried  out  by  a  body  of  special  officials  known  as 
"syndics"  or  lawyers.  They  must  have  had  legal  train- 
ing and  be  qualified  for  the  judicial  office.  By  such  prep- 
aration they  have  public  authority  to  attest  documents. 

Only  the  lawyers  appointed  by  the  credit  associations 
and  the  lower  employees  receive  salaries.  All  other 
officers  must  be  chosen  by  the  general  assembly,  or  by 
certain  committees,  from  among  the  incorporated  landed 
proprietors  who  serve  without  pay.  The  ground  of  their 
eligibility  is  their  property  qualification  as  members  of 
the  association.  But  when  an  honorary  member  expends 
money  as  a  cost  of  representing  the  association,  he  re- 
ceives pay  on  a  moderate  scale  as  compensation  for  loss 
of  time  and  necessary  expenses.  The  higher  officials 
chosen  by  the  society  are  confirmed  in  their  office  either 
by  the  king  or  by  the  royal  commissioner  who  is  usually 
the  head  of  the  district  or  province. 

When  a  farm  mortgage  credit  association  has  received 


Long-time  Credit  81 

its  charter,  it  can  issue  bonds  to  members  who  desire  to 
borrow  on  mortgage.  The  members  first  submit  their 
land  to  appraisal  and  mortgage  their  property  to  the  credit 
association  which  is  thus  placed  in  a  position  to  dispose  of 
the  combined  credit  of  the  entire  membership.  As  such 
an  association  is  established  without  capital,  the  money 
required  to  supply  the  needs  of  members  is  raised  by  the 
issue  of  bonds.  These  bonds  are  secured  by  mortgages 
on  the  farms  of  all  the  members,  and  they  are  sold  on  the 
open  market  the  same  as  the  bonds  of  a  railroad  or  other 
corporation.  The  principle  in  both  cases  is  precisely  the 
same,  since  the  bonds  represent  the  whole  or  a  part  of  the 
valuation  of  the  real  property.  By  this  means  a  security 
on  farm  lands  is  created  that  can  be  realized  at  any  time 
and  which  is  far  superior  to  a  mere  individual  mortgage 
security. 

Since  these  mutual  credit  associations  are  organizations 
of  borrowers,  they  have  no  need  of  capital,  they  aim  to 
keep  interest  rates  as  low  as  possible,  and  they  do  not 
carry  on  business  for  profit.  Each  member  has  to  pay  a 
small  entrance  fee  to  meet  running  expenses  for  a  clerk, 
business  office,  cost  of  land  valuation,  and  other  incidental 
expenses.  In  this  respect  they  are  essentially  different 
from  all  other  loan  firms,  especially  from  mortgage  banks. 

Every  landowner  who  belongs  to  a  farm  mortgage  credit 
association  is  entitled  to  an  amount  of  credit  proportionate 
to  the  value  of  his  land.  The  limit  of  credit  is  two-thirds 
of  the  land's  appraised  value.  When  a  member  desires 
to  borrow  money,  he  makes  application  to  his  organiza- 
tion. A  valuation  of  his  land  is  then  made  by  three  ab- 
solutely independent  assessors.     First,  it  is  made  by  a 


82  Principles  of  Rural  Credits 

committee  of  his  own  association  who  are  themselves 
farmers  and  landowners.  Two  or  three  of  them  are  sent 
to  value  the  land.  Then  there  is  another  valuation  by  an 
independent  assessor  in  the  district,  such  as  a  professor 
of  agriculture  or  other  competent  authority  on  farm-land 
values.  And  lastly,  there  is  a  valuation  by  the  officials 
of  the  association.  The  lowest  valuation  is  generally 
adopted.  In  this  way  a  valuation  of  the  land  is  secured 
which  is  absolutely  reliable  and  probably  below  the  real 
market  value.  If  a  farm  property  has  thus  been  valued  at 
$100,000,  then  the  member  is  entitled  to  a  credit  up  to 
$66,667. 

But  the  credit  association  is  unable  to  advance  money 
to  a  member  because  it  has  no  capital.  So  the  society 
issues  bonds  to  the  amount  of  the  loan  desired  and  turns 
them  over  to  the  borrower  who,  in  turn,  executes  a  mort- 
gage for  the  amount.  The  mortgage  is  registered  in  the 
books  kept  by  the  civil  law  officials,  but  it  is  held  by  the 
association.  The  bonds  which  the  member  receives  are 
not  secured  by  his  specific  mortgage,  but  by  all  the  assets 
or  mortgages  of  the  association.  The  bonds  are  made 
payable  to  bearer.  Intending  borrowers  indicate  at  the 
time  of  making  application  at  what  rate  of  interest  they 
wish  to  borrow.  The  rates  most  usually  open  to  their 
choice  are  3,  3^2,  4  and  43^  per  cent  bonds.  In  the  year 
1913  the  bonds  in  circulation  were  practically  all  of  3,  3^ 
and  4  per  cent  bonds,  the  V/2  per  cent  bonds  being  dis- 
tinctly predominant.  Naturally  the  market  value  of 
bonds  is  regulated  by  the  amount  of  interest  they  bear. 
Thus,  in  1913,  3  per  cent  bonds  sold  for  81,  Q/2  per  cent 
bonds  for  91,  and  4  per  cent  bonds  for  95. 


Long-time  Credit  83 

But  in  order  to  realize  the  money  desired,  the  landowner 
must  sell  the  bonds  handed  to  him  by  his  association. 
The  price  of  farm-mortgage  bonds  varies  on  the  money 
market  the  same  as  bonds  of  other  corporations,  so  that 
possible  losses  on  the  exchange  must  be  borne  by  the  land- 
owner. If  the  bonds  are  sold,  the  owner  of  the  estate  is 
debtor  to  the  credit  association  and  responsible  to  it 
personally  and  with  his  property  to  the  full  extent  of  his 
bond  debt.  On  the  other  hand,  the  association  is  creditor 
to  the  proprietor  and  at  the  same  time  debtor  to  the  holder 
of  the  bonds.  The  latter,  however,  has  only  a  personal 
claim  against  the  association.  No  more  bonds  can  be 
issued  than  are  covered  by  mortgage  of  like  amount  and 
bearing  equal  interest.  The  great  guaranty,  then,  for  the 
holder  of  bonds  lies  in  the  fact  that  every  bond  is  secured 
by  a  corresponding  mortgage  of  the  credit  association, 
since  it  may  be  safely  affirmed  that,  as  a  rule,  the  mort- 
gage indebtedness  does  not  exceed  half  the  commercial 
value  of  the  properties  mortgaged.  The  landowner  who 
receives  the  bonds  either  sells  them  himself  wherever  he 
can  find  a  customer  or  he  may  sell  them  through  a  banker. 
The  bonds  are  issued  at  par  with  various  nominal  values 
ranging  from  $25  to  $1,000,  but  they  may  sell  below  or 
even  above  par.  As  a  rule,  however,  the  price  of  these 
farm-mortgage  bonds  is  very  stable.  Any  loss  or  gain  in 
the  selling  of  the  bonds  is  a  risk  assumed  by  the  borrower. 

The  repayment  of  the  loan  is  by  means  of  amortization ; 
that  is,  a  small  part  of  the  principal  is  paid  off  annually. 
The  usual  amortization  rate  by  credit  associations  is  one- 
half  per  cent.  They  also  usually  charge  one-half  per  cent 
for  running  expenses.    If  the  bond  calls  for  V/z  per  cent 


84  Principles  of  Rural  Credits 

interest,  then  the  debtor  has  to  pay  4J/£  per  cent  each  year 
as  follows:  V/2  per  cent  interest  on  bonds,  3^2  per  cent  for 
running  expenses,  and  Yi  Per  cen^  amortization  of  debt. 
Interest  is  paid  only  on  the  remaining  indebtedness. 
In  this  way  both  the  debt  and  the  amount  of  the  annual 
interest  are  constantly  diminishing  until  the  whole  in- 
debtedness is  repaid  at  the  end  of  about  50  years.  More- 
over, the  debtor  can  pay  off  his  indebtedness  at  any  regular 
interest  period  by  giving  previous  notice  to  this  effect; 
but  the  debtor  cannot  himself  be  called  on  to  pay  his  in- 
debtedness so  long  as  the  land  pledged  as  security  is  not 
allowed  to  deteriorate. 

On  the  other  hand,  if  the  holder  of  farm-mortgage 
bonds  wants  his  money  for  any  purpose,  all  he  has  to  do 
is  to  sell  the  bonds  he  holds.  There  is  always  a  ready 
market  for  mutual  credit  association  bonds  because  of 
being  regarded  as  first-class  security  for  the  investment  of 
trust  funds.  In  Prussia,  the  law  provides  that  widows' 
and  orphans'  funds  may  only  be  invested  in  government 
bonds  or  in  mutual  credit  association  bonds.  Since  there 
are  generally  trustees  in  the  market  who  have  trust  funds 
to  invest,  these  farm-mortgage  bonds  can  be  sold  at 
almost  any  time.  And  this  is  also  a  factor  in  maintaining 
the  stability  of  these  bonds. 

The  repayment  of  the  debt  by  amortization  is  of  great 
advantage  to  the  landowner  since  no  large  sum  has  to  be 
paid  at  any  one  time.  When  10  per  cent  of  the  debt  has 
been  repaid,  debtors  are  generally  permitted  to  claim 
cancellation  to  that  extent  in  the  registry  of  title.  But  in 
many  instances  the  amortization  system  is  prevented 
from  being  really  effective  in  extinguishing  indebtedness, 


Long-time  Credit  85 

because  debtors  are  frequently  allowed  to  borrow  again 
to  the  extent  of  the  amount  of  indebtedness  cancelled. 
The  money  paid  in  on  the  amortization  plan  is  used  each 
year  to  redeem  outstanding  mortgage  bonds.  The  credit 
association  purchases  these  bonds  at  the  prevailing  market 
rate.  If  they  are  bought  in  at  the  same  price  they  were 
sold,  the  borrower  loses  nothing  on  the  transaction.  But 
in  case  the  price  of  bonds  rises  above  par,  the  credit  as- 
sociation is  entitled  to  the  premium  above  the  amount  due 
the  bondholders.  The  Landschaft  in  Saxony  can  redeem 
bonds  at  par.  The  great  advantage  to  the  debtor  farmer 
lies  in  the  fact  that,  if  the  bonds  are  selling  below  par,  he 
can  go  into  the  market  at  any  time,  buy  bonds,  pay  off  his 
indebtedness,  and  take  up  new  bonds  at  the  lower  rate 
of  interest.  But  if  the  bonds  are  selling  above  par  when 
he  is  prepared  to  repay  his  indebtedness,  he  has  to  pay 
par  value  only  to  the  credit  association.  Thus,  if  a  farmer 
owes  $10,000  on  mortgage  and  wants  to  pay  it,  he  buys 
bonds  bearing  the  same  rate  of  interest  as  his  mortgage 
and  presents  them  to  the  credit  association  which  is  bound 
to  accept  them.  If  a  bond  having  a  face  value  of  $100  is 
selling  for  90,  the  farmer  buys  100  bonds  for  $9,000  and 
thereby  cancels  his  $10,000  mortgage. 

But  the  credit  association  meets  any  possible  loss  of  this 
kind  by  means  of  the  sinking  fund  which  has  come  into 
existence  in  the  course  of  years  as  a  result  of  savings  in 
running  expenses,  premiums  on  bonds,  and  other  profits. 
With  many  credit  associations,  the  sinking  fund  which  has 
thus  arisen  amounts  to  a  considerable  sum.  Since  the 
farmer  borrowers  are  themselves  the  association,  the  ac- 
cumulated profits  or  savings  in  the  sinking  fund  belong 


86  Principles  of  Rural  Credits 

to  them.  When  the  sinking  fund  reaches  5  per  cent  of 
the  outstanding  obligations  of  the  association,  no  more 
has  to  be  paid  into  it.  Then  the  profits  are  very  often 
applied  in  reducing  the  indebtedness  of  the  members  by 
applying  it  on  the  amortization.  In  this  way  the  profits 
very  often  make  the  amortization  as  much  as  1  per  cent 
instead  of  the  customary  Y2  or  %  W*  cent.  Thus  the 
farmer  debtors  reap  all  the  benefits. 

As  previously  stated,  the  farm  mortgage  mutual  credit 
associations  were  created  exclusively  for  the  landed  no- 
bility. But  in  course  of  time,  with  the  development  of 
the  Prussian  land  laws,  the  need  was  felt  for  the  extension 
of  their  scope  so  as  to  include  the  remaining  large  farmers, 
small  farmers,  and  even  peasant  proprietors.  Now,  there- 
fore, these  credit  associations  regard  it  as  one  of  their 
highest  duties  to  afford  the  benefits  of  organized  loans, 
which  cannot  be  called  in,  at  low  rates  of  interest  and  re- 
payable by  small  installments  or  amortization,  especially 
to  owners  of  small  and  medium-size  farms.  For  this  pur- 
pose special  credit  associations  have  been  established  for 
peasant  proprietors  in  several  provinces  in  connection  with 
the  associations  for  great  proprietors  and  the  nobility. 
In  other  provinces  advances  on  small  and  large  farms  are 
made  by  the  same  association.  In  view  of  the  fact  that 
farm  mortgage  mutual  credit  has  been  allowed  to  55,000 
peasant  farmers  up  to  1913,  it  is  evident  that  the  scope 
of  this  form  of  credit  is  being  rapidly  extended.  At  the 
same  time  it  has  not  acquired  the  position  with  peasants 
and  small  proprietors  that  it  holds  with  great  landowners, 
notwithstanding  the  progress  which  has  been  made  in 
this  respect.     Of  the  farms  which  exceed  250  acres  in 


Long-time  Credit  87 

size,  66.3  per  cent  have  availed  themselves  of  the  advan- 
tages of  the  mutual  credit  associations,  while  the  cor- 
responding proportion  in  the  case  of  peasant  proprietors 
is  only  13.5  per  cent.  It  is  evident,  therefore,  that  the 
economic  importance  of  this  credit  system  will  in  future 
depend  on  how  far  it  assists  in  bringing  about  the  preva- 
lence of  organized  credit  in  the  domain  of  small  and  peasant 
farms. 

As  an  aid  to  promoting  the  sale  of  bonds  and  conducting 
other  banking  business  in  behalf  of  their  members,  some 
of  the  German  mutual  credit  associations  have  established 
banks  for  these  purposes.  Originally  the  borrower  had 
to  sell  his  own  bonds  which  were  handed  to  him  to  the 
nominal  value  of  the  sum  he  wished  to  borrow.  But  now 
the  borrower  deposits  these  bonds  in  his  association  bank 
and  he  is  given  their  market  value  in  cash;  that  is,  he  ex- 
changes bonds  for  currency  and  receives  the  current 
market  price  for  the  bonds.  Theoretically,  the  bonds  are 
sold  by  the  bank  at  the  current  rate  of  exchange  on  the 
Bourse  and  the  money  is  paid  over  to  the  borrower  by  the 
bank. 

The  farm  mortgage  mutual  credit  association  of  the 
Province  of  Saxony  established  a  bank  with  $750,000  as  a 
working  capital  which  it  had  accrued  little  by  little  out  of 
its  profits  and  savings.  This  was  done  by  the  board  of 
directors  as  a  means  of  applying  the  profits  to  the  benefit 
of  the  borrowers.  This  bank  handles  all  the  money  of  the 
association  and  carries  on  whatever  publicity  campaign 
is  necessary  to  develop  a  market  for  the  bonds  and  to 
secure  as  wide  a  circulation  for  them  as  possible.  The 
bank  also  does  both  real  and  personal  credit  business  as 


88  Principles  of  Rural  Credits 

well  as  all  the  usual  commercial  banking  transactions. 
The  profits  of  the  bank  all  go  to  the  association  for  the 
benefit  of  its  members. 

These  associations  of  borrowers  have  been  given  legal 
power  to  enforce  payment  of  all  debts  due  without  re- 
course to  law  by  reason  of  the  fact  that  the  mortgaged 
property  comes  under  the  control  of  the  association  when 
it  grants  bonds  on  it.  The  right  of  compulsory  adminis- 
tration has  also  been  granted  the  associations.  Loans 
to  mortgagors  in  arrears  of  payments  are  not  immediately 
recalled,  as  the  debtor  is  given  every  opportunity  to  pro- 
vide for  payment.  Most  associations,  however,  charge  an 
increased  rate  of  interest  upon  payments  in  arrears,  usually 
5  per  cent,  and  as  security  a  further  charge  is  entered  in  the 
registry  of  title  against  the  estate.  Should  it  become 
necessary  to  sell  a  debtor's  farm,  it  is  usually  sold  by  auc- 
tion in  the  open  market.  If  the  value  of  a  farm  is  $50,000, 
this  amount  may  be  realized  at  public  sale.  Suppose  it 
should  soil  for  $45,000  and  there  is  a  mortgage  on  it  for 
$25,000.  Then  the  association  collects  its  debt  of  $25,000, 
together  with  the  costs  of  sale  and  other  incidental  ex- 
penses, which  are  very  light  under  this  system  of  fore- 
closure sale,  and  the  difference  of  nearly  $20,000  is  turned 
over  to  the  landowner  who  had  not  paid  up  his  interest. 
In  this  way,  every  consideration  is  given  to  the  debtor 
and  for  the  protection  of  his  interests. 

The  farm  mortgage  associations  are  administered  as 
follows:  The  members  come  together  in  general  assembly 
which  body  elects  its  own  council  of  administration,  while 
the  latter  appoints  the  board  of  directors.  The  board 
of  directors  consists  of  a  general  director  and  two  other 


Long-time  Credit  89 

directors,  and  at  least  one  of  the  latter  must  be  an  active 
member  of  the  association.  In  addition  there  are  several 
other  directors,  one  of  whom  is  a  lawyer  who  transacts 
all  the  association's  legal  business.  The  members  of  the 
board  are  government  officials  indirectly  under  govern- 
ment control.  The  legal  officer  of  the  association  does  the 
same  work  as  that  of  a  notary.  A  royal  commissioner, 
with  the  minister  of  agriculture,  has  direct  supervision 
over  the  work  of  the  associations.  Besides  the  central 
board  of  directors,  other  local  directors  are  elected  for  the 
various  divisions  of  the  territory  covered  by  an  association. 
Such  directors  must  not  only  be  property  holders  in  their 
districts,  but  they  must  also  reside  there  the  greater  part 
of  the  year.  By  virtue  of  their  office,  they  are  members 
of  the  valuation  revision  committee  and  they  must  notify 
the  central  board  of  any  irregularity  or  circumstance 
coming  under  their  notice  which  is  likely  to  impair  the 
value  of  the  association's  claims  upon  mortgaged  property. 
Councillors  are  also  elected  to  district  committees,  who 
must  hold  property  and  reside  in  the  district  they  repre- 
sent. Their  business  is  to  assist  in  the  valuation  of  farms 
for  which  loans  are  desired,  to  supervise  farms  upon  which 
loans  have  been  made  or  which  are  compulsorily  managed 
in  behalf  of  their  association,  and  to  report  any  circum- 
stances likely  to  depreciate  the  property  upon  which  their 
association  holds  a  mortgage. 

In  Germany,  there  are  23  of  these  farm  mortgage  mutual 
credit  associations  organized  on  a  cooperative  basis  in 
order  to  provide  money  for  their  members  by  the  issue  of 
bonds  secured  by  mortgages  on  farm  property.  Of  this 
number,  22  issue  bonds  on  farm  mortgages  alone,  while 


90  Principles  of  Rural  Credits 

the  other  issues  bonds  on  urban  as  well  as  on  rural  mort- 
gages. Prussia  alone  has  17  of  these  associations,  the  other 
6  being  in  different  provinces. 

THE   CENTRAL  FARM   MORTGAGE   ASSOCIATION 

Like  the  Raiffeisen  personal  credit  banks,  the  farm  mort- 
gage associations  felt  the  need  of  a  central  institution, 
particularly  the  Prussian  associations.  Hence  there  was 
organized  in  1873  a  central  association  by  the  affiliation 
of  eight  Prussian  associations  and  one  mortgage  institu- 
tion with  communal  guaranty  which  loaned  on  both 
urban  and  rural  property.  The  central  farm  mortgage 
credit  association  was  granted  the  right  of  a  special  cor- 
poration with  the  power  to  issue  central  farm-mortgage 
bonds. 

The  central  association  is  managed  by  directors  chosen 
from  the  leading  officials  of  the  affiliated  associations.  Its 
object  was  to  issue  central  bonds  on  behalf  of  its  members, 
but  these  member  associations  retained  full  authority 
to  continue  to  issue  their  own  bonds  as  before.  As  a 
matter  of  fact,  then,  this  organization  simply  enabled  the 
provincial  associations  which  were  members  of  it  to  issue 
central  bonds  in  addition  to  their  own  bonds. 

The  necessary  conditions  for  the  issue  of  central  bonds 
were  the  same  as  those  for  the  issue  of  bonds  by  the  pro- 
vincial associations,  namely,  that  they  had  to  represent 
the  value  of  mortgages  on  farms  situated  in  the  district 
of  any  particular  association  on  whose  behalf  such  central 
bonds  were  issued.  The  basis  upon  which  the  security  for 
the  bonds  was  founded  was  determinable  according  to  the 
articles  of  association,  rules  for  valuing  farm  property, 


Long-time  Credit  91 

and  other  practices  in  force  by  each  particular  associa- 
tion. 

One  chief  purpose  in  organizing  the  central  association 
was  to  open  a  wider  market  for  bonds  of  the  provincial 
associations.  It  was  believed  that  such  central  bonds 
would  find  not  only  a  better  market  in  Germany,  but 
would  be  sold  in  foreign  countries  also.  The  bonds,  by 
obtaining  a  wider  market,  it  was  thought  would  be  less 
exposed  to  fluctuations,  since  bad  harvests  and  other  agri- 
cultural evils  are  usually  only  local,  and  while  their  oc- 
currence might  seriously  affect  provincial  association  bonds 
they  would  not  be  likely  to  affect  the  price  of  bonds  resting 
upon  much  broader  areas. 

During  the  years  from  1870  to  1875,  when  the  central 
association  was  founded,  the  market  prices  of  the  bonds 
of  several  Prussian  associations  were  low  and  unsteady. 
While  for  some  time  after  the  establishment  of  the  central 
association  the  prices  of  bonds  improved,  still  it  has  not 
met  with  the  success  anticipated,  especially  as  to  the  sale 
of  its  bonds  in  foreign  countries.  The  prices  of  central 
bonds  did  not  maintain  superiority  over  the  bonds  of 
provincial  associations.  About  one-seventh  of  the  total 
value  of  bonds  circulated  by  Prussian  farm  mortgage 
credit  associations  is  represented  by  central  bonds,  and 
by  far  the  greatest  part  of  these  have  been  issued  in  behalf 
of  the  associations  operating  mainly  in  Brandenburg, 
which  appear  to  issue  central  bonds  almost  exclusively, 
and  in  whose  hands  the  practical  management  of  the 
affairs  of  the  central  association  seems  to  rest. 

The  want  of  success  of  the  central  association  is  attrib- 
uted to  two  principal  causes.    First,  the  provincial  associa- 


mcipk*  o/  Rural  CrtdiU 

-  -  .  -  :,-.-.  ...  -  -  --  ■  :  ■  •••-  -.-•:.:  y  •-■-•'-- 
dependence  in  faror  of  a  central  b  md,  second,  the 

market  for  bonds  has  always  been  main];  ncial  be- 

cause of  the  historical  development  of  these  associations. 
They  bare  been  in  existence  for  upwards  of  150  Tear*. 
and  the  people  hare  been  accustomed  to  buying  their  own 
bonds,  while  the  bonds  of  the  central  association  have  01 
been  on  the  market  since  IS!  For  these  reasons  they  do 
not  sell  -  -II     In  many  rases,  provincial  bands  are 

only  quoted  on  one  or  two  exchanges  besides  their  own 
center,  and  they  are  readily  disposed  of  there.  With 
many  of  the  largest  credit  associations,  b  their 

bonds  are  sold  on  the  exchanges  throughout  the  German 
opire.    This  b  due  to  the  fact  that  the  farm  mortgage 
credit  association  bond  is  regarded  as  a  pad         ype  of 

The  farm  mortgage  cooperate 
bold  the  leading  position  in  the  department  of  rural 
credit  in  Europe.  From  an  ac-  oral  point  of 
their  importance  may  be  dearly  seen  from  the  results 
already  achk-vcd.  To  the  year  2  the  Prussian  associa- 
tions alone  had  issued  bonds  covering  mortgage  loans  to 
the  total  amount  of  57  v UOOOJWWL    The  principal  amount 

KJDUWI  ner  cent,  foWOOOjOOO  .  per  or 

. '  CKMMHO  at  4  per  cent.    The  rate  of  interest  on 

bunds  chaox  th  the  state  of  the  money  market.    In 

:.    •  •• ....-    •  -..  -  ■  -  ■     •     .-.-.-.     •  •  -     :•--.•  •>-*    .--  •    .- 

.--■-•,.-.     ■ 


Long-time  Credit  93 

rate  as  possible.  For  this  reason  the  rate  of  interest  on 
bonds  depends  in  a  great  decree  on  the  rise  and  fall  of  the 
rate  on  exchange,  so  that  it  form.-  a  true  picture  of  the 
general  increase  and  decrease  of  interest. 

The  amount  of  sinking  fund  accumulated  by  the  Prus- 
sian associations  up  to  1912  reached  a  total  of  SIS. 000,000, 
and  the  remaining  guaranty  and  reserve  funds  amounted 
to  $12,500,000.  At  the  time  of  their  establishment  these 
associations  possessed  no  capital  of  their  own,  because 
they  only  acted  as  credit  agents  without  the  purpose  of 
gain.  But  in  the  course  of  time,  they  collected  a  capital 
of  their  own  derived  chiefly  from  savings  in  the  cost  of 
administration.  These  funds  in  1013  amounted  to  about 
$14,000,000. 

The  merits  and  advantages  of  these  farm  mortgage  credit 
associations  in  meeting  the  requirements  of  mortgage  or 
long-time  credit  for  fanners  may  be  summarized  as  follows; 

1.  They  enable  both  large  and  small  landowners,  as  it 
were,  to  mobilize  their  property  by  means  of  bonds  which 
circulate  in  the  general  system  of  securities  and  become 
realizable  at  any  time  in  the  money  market. 

2.  The  loans  granted  are  not  subject  to  recall. 

3.  The  rates  of  interest  are  kept  as  low  as  possible  and 
closely  correspond  with  the  market  rates  for  money. 

4.  Since  the  bonds  are  irredeemable  by  the  holder,  the 
rate  of  interest  cannot  be  raised. 

5.  The  debt  is  extinguished  gradually  by  amortization. 

6.  The  right  is  granted  to  the  debtor  to  reduce  his 
debt  by  additional  payments  to  suit  his  convenience. 

7.  The  expenses  for  land  valuation  and  other  charges 
are  low. 


94  Principles  of  Rural  Credits 

8.  The  cost  of  administration  of  the  associations  is 
relatively  low  and  yet  their  officials  are  highly  qualified 
for  their  work. 

The  advantages  of  this  system  over  ordinary  commercial 
mortgage  practices  are  very  great.  Farmers  are  not  usu- 
ally in  a  position  to  repay  mortgage  loans  in  lump  sums; 
and,  if  a  loan  should  suddenly  be  called  in,  they  would 
have  to  borrow  elsewhere,  which  cannot  always  be  done 
without  burdening  themselves  with  additional  costs, 
higher  interest  rates,  loss  of  time,  and  other  disadvantages. 
The  rates  of  interest  on  commercial  mortgages  are  gen- 
erally higher  than  the  interest  rates  on  bonds  of  a  farm 
mortgage  association.  There  is  a  great  advantage  in 
being  free  from  the  liability  of  an  increased  rate  of  inter- 
est. Furthermore,  repayment  of  mortgage  loans  by  in- 
stallments at  the  will  of  the  borrower  or  in  small  annual 
amounts  by  amortization  to  a  sinking  fund  is  rarely  granted 
by  private  money  lenders  or  by  ordinary  commercial 
banks.  Another  advantage  is  that  of  economy  in  ad- 
ministration. Since  these  mutual  associations  do  not  aim 
to  make  profits,  the  borrowers  themselves  obtain  the  full 
advantage  of  low  initial  charges  for  land  valuation  and 
other  necessary  costs  in  granting  loans. 

Since  the  directors  at  the  central  office  are  themselves 
landowners  and  borrowers  who  hold  honorary  office,  the 
management  is  both  inexpensive  and  efficient  because  the 
directors  are  thoroughly  conversant  with  the  needs  of 
farmers  and  the  value  of  farms  and  estates.  Similar  ad- 
vantages arise  from  the  fact  that  local  representatives  of 
these  associations  not  only  hold  honorary  office,  but  are 
also  borrowing  farmers;  and  they  are  thus  in  a  position 


Long-time  Credit  95 

to  judge  the  farming  condition  of  estates  and  the  business 
ability  of  owners.  They  are,  therefore,  capable  of  super- 
vision over  mortgaged  farms. 

As  a  result  of  adequate  accumulated  funds,  some  associa- 
tions are  able  to  grant  loans  almost  without  any  incidental 
charges  except  such  as  are  necessary  to  meet  actual  costs 
expended  at  the  time,  such  as  registration  fees,  and  so  on. 

An  indirect  advantage  to  farmers  arises  from  their  being 
made  acquainted  with  the  value  of  their  lands  by  means 
of  the  valuations  made  by  the  associations,  the  results  of 
which  are  always  communicated  to  prospective  borrowers. 
This  knowledge,  especially  since  the  associations  now 
admit  to  membership  owners  of  medium-size  and  small 
farms,  can  scarcely  fail  to  have  a  beneficial  effect  upon 
farming  operations. 

In  their  unselfish,  public-spirited  labors,  free  from  every 
tendency  to  profit  making,  the  farm  mortgage  associations 
have  rendered  the  most  important  services  to  the  state 
by  encouraging  and  preserving  a  vigorous  and  healthy 
agriculture.  The  extensive  privileges  granted  to  them  by 
the  state,  such  as  the  right  of  seizing  mortgaged  lands  with- 
out adopting  legal  procedure,  the  right  of  seizing  movable 
property,  and  the  like  are  almost  equal  to  the  rights  of 
government.  On  mortgaged  farms,  the  claim  of  the 
association  is  regarded  as  a  full  proof  of  debt;  and  the  power 
to  seize  movable  property  is  of  great  practical  importance 
in  accelerating  the  collection  of  overdue  interest.  Thus, 
a  legal  seizure  can  at  once  take  place  on  documentary 
proof  furnished  by  the  lawyer  of  an  association.  On  its 
own  authority,  an  association  can  also  administer  mort- 
gaged farms  both  for  collection  of  overdue  claims  as  well 


96  Principles  of  Rural  Credits 

as  for  seizure  when  there  are  legal  grounds  therefor. 
And  lastly,  the  quality  of  absolute  legal  security  is  vested 
in  the  bonds  of  farm  mortgage  associations.  For  these 
reasons,  these  associations  are  justly  regarded  as  the  most 
highly  developed  and  most  useful  long-time,  or  mortgage, 
credit  institutions  in  existence. 

Quite  recently,  some  of  the  mutual  farm  mortgage 
associations  have  granted  loans  for  building  good  and 
suitable  dwellings  for  farm  laborers  on  the  farms  of  their 
members,  as  well  as  for  the  carrying  out  of  such  improve- 
ments as  drainage  of  wet  lands.  But  mortgage  credit 
cannot  be  used  in  raising  funds  for  these  purposes,  and 
the  surplus  funds  accruing  from  the  business  of  the  banks 
of  the  credit  associations  have  been  put  to  good  service 
in  these  directions.  These  associations,  therefore,  are  on 
the  threshold  of  a  new  development.  The  increasing 
scarcity  of  farm  laborers,  the  great  economic  importance 
for  large  farms  to  have  a  sufficient  supply  of  capable  farm 
hands,  the  difficulties  with  which  agriculture  has  to  con- 
tend, and  the  necessity  of  increasing  the  yield  of  crops  to 
meet  the  demands  of  an  increasing  population  have  urged 
the  directors  of  the  mutual  credit  associations  to  turn  their 
attention  to  these  new  undertakings  as  means  of  promoting 
the  general  welfare. 

Notwithstanding  their  importance,  advantages  and 
merits,  the  "  Landschaften,"  or  farm  mortgage  cooperative 
credit  associations,  as  institutions  operated  by  and  in 
behalf  of  farmers  for  financing  their  industry  on  a  long- 
time basis,  have  practically  been  limited  to  Germany  in 
their  field  of  operations. 


CHAPTER  VI 

NON-COOPERATIVE   FARM   MORTGAGE   OR 
LONG-TIME  CREDIT 

A — Provincial  and  State-Endowed  Mortgage  Credit 

Banks 

Besides  the  successful  means  German  farmers  have 
adopted  for  promoting  cooperative  mortgage  credit, 
various  banking  institutions  in  many  European  countries 
have  aided  the  development  of  agriculture  by  granting 
long-time  loans  on  farm  properties.  The  importance 
of  all  these  agencies  in  financing  the  farmer  renders  it 
necessary  to  review  briefly  the  methods  practiced  by  these 
banking  institutions.  By  this  means  American  farmers, 
as  well  as  state  and  national  legislators,  will  have  before 
them  sufficient  data  for  their  guidance  in  formulating 
farm-mortgage  systems  adapted  to  meet  existing  agri- 
cultural conditions  in  different  parts  of  our  great  common- 
wealth. 

provincial  mortgage  credit  banks 

Germany 

Probably  no  country  in  Europe  surpasses  Germany  in 
the  number  and  importance  of  non-cooperative  or  com- 
mercial institutions  which  have  come  to  the  aid  of  farmers 
by  furnishing  mortgage  credit  at  reasonable  rates  of  in- 

97 


98  Principles  of  Rural  Credits 

terest,  for  periods  of  time  to  meet  the  farmer's  economic 
needs,  and  for  protecting  the  interests  of  both  investors 
and  debtors.  Among  these  banks,  the  first  place  undoubt- 
edly belongs  to  those  which  have  been  established  for  the 
whole  of  a  state,  or  a  province,  or  an  administrative  dis- 
trict within  a  province.  The  liabilities  of  these  state, 
provincial  or  district  banks  are  guaranteed  by  the  public 
authority  itself,  which  either  directly  manages  or  minutely 
supervises  their  management;  while  the  profits  accruing 
from  the  business  of  these  institutions  revert  to  the  state, 
province  or  district  which  controls  them. 

But,  out  of  16  of  these  banks  whose  liabilities  are  guar- 
anteed by  the  public  authority,  the  bank  at  Hanover 
is  the  only  one  which  restricts  its  mortgage  loans  to  rural 
property.  The  original  purpose  of  many  of  these  banks 
was  to  render  financial  assistance  to  owners  of  small  and 
medium-size  farms.  This  was  done  by  means  of  loans  on 
mortgages  reducible  by  small  annual  payments  and  by 
granting  loans  to  facilitate  the  redemption  of  old  servitude 
debts  which  had  incumbered  many  peasant  farms  for 
centuries.  The  state  or  provincial  banks,  however,  have 
lost  this  special  character  which  has  been  largely  taken 
over  by  the  annuity  or  land-improvement  banks,  par- 
ticularly in  Prussia.  The  latter  banks  make  loans  to  the 
peasant  for  paying  off  the  feudal  debts  which  incumber 
his  farm. 

While  this  particular  purpose  has  been  lost,  the  provin- 
cial banks  have  continued  to  some  extent  to  serve  the 
needs  of  owners  of  small  and  medium-size  farms  by  grant- 
ing them  facilities  for  obtaining  loans  at  moderate  rates 
of  interest,  not  subject  to  recall,  and  repayable  in  small 


Long-time  Credit  99 

annual  installments.  The  rates  of  interest  range  from 
33^  to  4  per  cent,  with  an  additional  charge  of  x/±  to  Y2 
per  cent  for  cost  of  administration.  Amortization  pay- 
ments are,  as  a  rule,  compulsory,  the  minimum  amounts 
being  variously  fixed  at  3^,  ZA  or  1  per  cent.  The  right 
of  making  additional  repayments  is  also  granted  to  the 
debtor  by  giving  from  three  to  six  months'  notice.  Repay- 
ment of  the  whole  farm-mortgage  debt  may  also  be  made 
at  any  time  after  10  years  by  presenting  to  the  bank  its 
bonds  bearing  the  same  rate  of  interest  and  for  the  same 
nominal  value  as  the  bonds  issued  to  the  borrower. 

Funds  for  operating  the  provincial  banks  are  mainly 
obtained  by  the  issue  of  mortgage  bonds.  These  are  con- 
sidered as  safe  securities  for  trustee  funds.  But  working 
capital  is  also  provided  by  deposits,  by  the  amortization 
payments  on  mortgages,  by  accumulated  funds,  and  by 
loans  or  grants  from  the  state,  province  or  district  con- 
cerned. The  bonds  of  this  class  of  banks  are,  in  most 
cases,  redeemable  by  the  banks  themselves  by  drawings; 
but,  as  a  rule,  a  certain  time  must  elapse  after  an  issue  of 
bonds  before  a  bank  may  include  them  in  a  drawing. 
Most  of  the  provincial  banks  pay  their  loans  in  cash  and 
not  in  bonds,  as  is  the  case  with  the  mutual  cooperative 
mortgage  banks. 

The  provincial  credit  banks  are  usually  exempted  from 
stamp  duties  and  court  fees.  For  determining  the  standing 
of  prospective  borrowers,  they  can  require  information  of 
local  revenue  authorities  and  other  officials.  To  secure 
information  about  borrowers,  some  banks  appoint  private 
persons  in  different  districts  as  their  agents.  They  are 
thus  enabled  not  only  to  secure  the  necessary  information 


100  Principles  of  Rural  Credits 

concerning  local  farm  properties,  but  are  also  able  to  bring 
credit  facilities  within  the  reach  of  farmers  in  their  re- 
spective districts. 

Since  these  banks  grant  mortgage  loans  on  urban  as 
well  as  rural  properties,  it  is  not  always  possible  to  de- 
termine the  proportion  falling  to  loans  on  farm  mort- 
gages. However,  the  statistics  from  eight  of  these  pro- 
vincial banks  for  the  year  1909  show  that  out  of  a  total 
of  $240,000,000  definitely  assigned  to  mortgage  loans, 
more  than  $100,000,000  were  on  farm  mortgages.  The 
Hanover  Provincial  Mortgage  Credit  Bank,  which  grants 
mortgage  loans  on  farm  property  only,  had  outstanding 
farm  mortgage  loans  in  1909  amounting  to  more  than 
$17,000,000. 

These  provincial,  or  semi-governmental,  banks  have 
successfully  fulfilled  their  purpose.  They  were  estab- 
lished in  parts  of  Germany  at  a  time  when  practically 
no  institutions  existed  for  granting  long-time  mortgage 
credit  to  farmers.  They  have  especially  served  the  needs 
of  owners  of  small  and  medium-size  farms  who  predominate 
in  their  respective  localities.  The  principle  of  compulsory 
reduction  of  debt  by  annual  payments  to  a  sinking  fund, 
which  was  not  adopted  by  the  cooperative  mortgage  credit 
associations  till  late  in  their  history — that  is,  from  1820 
to  1840 — was  quite  universally  applied  by  these  banks 
from  their  origin,  one  of  which  dates  back  to  1765.  The 
relative  freedom  from  mortgage  debt  enjoyed  by  small  and 
medium-size  farm  owners  in  several  German  provinces 
is  attributed  partly  to  this  compulsory  system  of  paying 
off  mortgages  by  convenient  installments.  They  have 
shown  also  that  mortgage  credit  on  the  most  favorable 


Long-time  Credit  101 

terms  may  be  granted  to  farmers  on  sound  business  prin- 
ciples. Not  aiming  at  profits  beyond  the  payment  of 
expenses,  they  have  been  able  to  grant  loans  more  cheaply 
than  ordinary  commercial  banks;  but,  as  a  matter  of  fact, 
considerable  sums  have  sometimes  been  applied  to  public 
purposes  as  a  result  of  profitable  operations  by  the  pro- 
vincial banks.  By  their  strict  business  organization  and 
careful  state  supervision,  they  secure  the  necessary  super- 
vision over  their  borrowers,  bring  their  benefits  more 
easily  within  the  reach  of  farmers  in  every  district,  and 
protect  investors  from  any  danger  of  loss. 

Austria 

The  economic  affairs  of  Austria  experienced  a  severe 
disturbance  in  1848  and  following  years.  This  caused  a 
serious  retardation  in  the  development  of  agricultural 
credit,  particularly  for  the  small  farmer.  The  banks  as  a 
whole  did  little  business  in  farm  mortgages  except  the 
Imperial  and  Royal  National  Bank  (now  known  as  the 
Austro-Hungarian  Bank),  which  was  organized  in  1856. 
But  the  work  of  this  bank  in  farm  mortgage  credit  was 
handicapped  by  reason  of  a  regulation  which  prohibited 
the  lending  of  less  than  $2,500  to  any  borrower.  This 
regulation  practically  excluded  the  larger  part  of  small 
farm  owners  from  taking  advantage  of  this  bank's  credit. 

For  farm  mortgage  credit  in  general,  the  provincial 
mortgage  banks  which  were  established  on  the  Prussian 
model  have  been  most  satisfactory  under  Austrian  eco- 
nomic conditions.  The  oldest  of  these  provincial  institu- 
tions are  the  Galician  Realty  Credit  Society,  founded  at 
Lemberg  in  1841;  the  Mortgage  Bank  of  the  Kingdom  of 


102  Principles  of  Rural  Credits 

Bohemia,  founded  at  Prague  in  1865;  the  Austro-Silesian 
Realty  Credit  Institute,  founded  at  Troppau  in  1869; 
besides  14  others,  or  17  provincial  banks  in  all,  established 
in  the  different  provinces  from  1876  to  1910.  These  banks 
are  not  run  for  profit  and  they  have  very  little  working 
capital  which  is  raised  by  the  issue  of  mortgage  bonds. 
These  bonds  are  secured  by  the  mortgages  themselves, 
by  the  assets  of  the  bank,  and,  finally,  by  the  guaranty  of 
the  provincial  government  the  same  as  with  the  German 
provincial  banks. 

Up  to  1910,  these  banks  had  issued  bonds  to  the  amount 
of  nearly  $390,000,000,  about  80  per  cent  of  which  were 
issued  on  farm  mortgages.  In  Austria,  agriculture  prefers 
the  mortgage  credit  of  the  provincial  banks  to  all  other 
sources  of  credit  because  they  offer  the  lowest  and  most 
stable  rates  of  interest,  because  loans  are  repayable  in 
small  annuities,  and  because  the  loans  cannot  be  called 
in.  For  these  reasons  the  provincial  banks  are  practically 
in  the  lead  so  far  as  farm  mortgage  credit  is  concerned. 
The  interest  on  bonds  runs  from  33^  to  53^  per  cent. 

The  provincial  banks  are  characteristic  of  Germany 
and  Austria,  and  they  merit  the  attention  of  countries 
where  the  greatest  possible  freedom  of  the  individual  and 
the  vigorous  development  of  the  state  as  a  whole  are  to  be 
found  working  harmoniously  together. 

STATE-ENDOWED   MORTGAGE   CREDIT   BANKS 

Hungary 

There  are  in  Hungary  four  institutions  of  different 
types  which  operate  in  the  field  of  agricultural  mortgage 


Long-time  Credit  103 

credit.  Although  the  government  has  aided  these  banks 
financially,  not  one  of  them  is  state-owned  like  the  pro- 
vincial mortgage  banks  of  Germany.  The  Hungarian 
government  has  been  content  to  draw  up  rules  and  regula- 
tions relating  to  them  and  to  provide  for  certain  rights  of 
supervision.  These  banks  possess,  however,  some  char- 
acteristic features  which  distinguish  them  from  all  other 
banks  in  Europe,  and  for  this  reason  they  deserve  a  brief 
mention. 

1.  The  Hungarian  Land  Mortgage  Institute  is  the  oldest 
bank  endowed  with  state  grants  for  promoting  farm  mort- 
gage credit.  Its  labors  are  practically  confined  to  owners 
of  large  estates.  This  institute  was  established  in  1863 
with  a  capital  of  about  $840,000,  of  which  sum  $250,000 
was  contributed  from  the  government  treasury  and  the 
balance  by  209  founders  who  cannot  receive  a  dividend 
on  their  shares  of  more  than  5  per  cent.  Later,  the  legis- 
lature endowed  it  with  very  important  privileges,  namely, 
special  rights  with  reference  to  executions  against  its 
debtors,  exemption  of  its  mortgage  bonds  from  the  pay- 
ment of  taxes  and  stamp  and  other  duties,  and  that  its 
bonds  were  suitable  for  the  investment  of  trust  funds. 
A  government  commissioner  is  appointed  to  see  that  the 
articles  of  association  are  duly  observed. 

This  bank  was  founded  on  strictly  altruistic  principles 
with  the  character  of  a  cooperative  society.  After  the 
payment  of  dividends  on  shares,  all  profits  are  added  to 
the  reserve  fund  which  serves  as  security  for  the  mortgage 
bonds  issued  by  the  institute.  While  the  bank  began  with 
a  nominal  capital  of  $840,000,  the  founders  had  to  pay  only 
10  per  cent  of  their  share,  the  remaining  90  per  cent  of  the 


10-1  Principles  of  Rural  Credits 

subscribed  capital  having  merely  to  be  guaranteed  by 
deed.  The  amount  thus  guaranteed  was  gradually  re- 
mitted as  the  reserve  fund  enlarged,  so  that  by  1875  the 
founders  were  finally  exempted  from  any  further  obli- 
gations as  to  paying  up  of  the  remaining  capital,  the  90 
per  cent  having  been  gradually  paid  out  of  the  profits  of 
the  bank. 

Besides  the  founders,  the  members  of  the  institute  in- 
clude those  large  estate  owners  whose  properties  have 
been  mortgaged  with  the  bank  for  an  amount  exceeding 
the  minimum  prescribed  for  this  purpose.  The  latter, 
however,  cannot  take  part  in  the  general  meetings  unless 
the  mortgage  loans  advanced  to  them  amount  at  least  to 
125,000.  The  other  debtors  are  grouped  by  districts, 
and  they  have  the  right  to  elect  a  delegate  to  take  part  in 
the  general  meetings,  at  which  the  members  and  rep- 
resentatives of  the  smaller  debtors  have  one  vote  each. 
As  between  the  debtors,  the  only  trace  of  mutuality  is 
the  duty  each  has  to  perform  of  paying  a  small  sum  into 
a  mutual  guaranty  fund  when  they  receive  mortgage 
loa: 

Since  its  foundation  up  to  the  close  of  1912,  the  institute 
had  granted  27.2S7  farm  mortgage  loans  amounting  to 
S214.692.597:  ite  reserve  fund  wz*  $12,497,666;  and  the 
mortgage  bonds  in  circulation  amounted  to  897,265,000, 
the  value  of  the  estates  mortgaged  as  their  security  being 
$357,700,000.  During  50  years,  only  three  mortgages  had 
been  foreclosed  and  the  institute  had  never  suffered  any 
loss. 

The  founders  have  a  right  to  vote  at  special  meetings 
in  the  election  of  a  president  and  a  council  of  supervision 


Long-i  ^.it  I 

and  on  question ;  r  .  *:ng  to  amendments  to  the  cons:::  > 
tion.  A:  ^-neral  meetings  they  have  the  same  rig:  - 
members  as  the  debtors  have.  The  council  of  supervision 
canasta  f  36  members  who  manage  and  control  the  ac- 
tivities of  the  bank.  From  the  meml-  -  ~  I  or  local 
committees  are  formed  to  represent  the  bank's  interests  in 
the  granting  and  protecting  of  lo:v  - 

2.  The  National  Small  Holdings  Land  Mortgage  In- 
-        iblished  in  1879  for  the  benefit  of  small 
fann  owners.    The  state  contributed  $25     00  to  its  capital 
and  the  leg:-  granted  it  the  san  vfleges 

and  favors  a  .:  had  to  the  Hungarian  Land  Mortgage 
Institute.  In  organization,  also,  thes  two  banks  are 
similar  so  far  as  their  members  consist  partly  of  found- 1  - 
and  partly  f  the  debtors  themselves  and  as  to  the  pa- 
nt of  not  more  than  5  per  ce:  ads  on  founder- 
shares.  But  they  differ  in  that  the  found  -  :he  small 
holdings  ins:::  ::  have  no  special  meetings,  the  council 
of  supervision  does  not  L:  -  great  authority,  and  the 
founders'  shares  are  transferable  subject  to  permission 
by  the  board  of  directors.  In  1913  the  founders'  shares 
represented  a  value  of  aboii'  $2  125  .00. 

e  original  object  of  :  -      provide  small 

farm  owners  with  both  personal  and  mortgage  credit. 
The  attempt  was  made  to  create    .  :    "vork  of  cooperat: 
credit  societies  for  promoting  the  material  interests  of 
sr-iah  I:ii:.::".T.Trs.     I"::  .:■ . :  :':.:■■  ;  -..:..  :" ■■-.:::;■"--:>:  :::"~h::x 
savings  -   aid  forty  mutual  credit  societies  affiliated 

with  the  small  holdings  institute.  But  the  directors  soon 
recognized  the  difficulties  of  providing  personal  credit  by 
the  aid  of  a  loose  organization  of  this  kind,  so  that  they 


106  Principles  of  Rural  Credits 

gradually  relinquished  the  activity  of  the  institute  in  the 
field  of  personal  credit  and,  since  1904,  have  confined  its 
work  to  farm  mortgage  credit  only. 

The  small  holdings  institute  is  not  privileged  to  fore- 
close and  take  possession  of  mortgaged  land,  in  case  the 
debtor  fails  to  pay  the  amortization  installments,  without 
due  process  of  law.  It  has,  however,  the  special  privilege 
of  being  able  to  ask  the  court  for  immediate  auction  with- 
out the  usual  and  somewhat  long  preliminary  proceedings. 
While  the  institute  could  take  this  course  if  the  debtor 
fails  in  even  one  payment,  still  recourse  to  law  is  usually 
not  taken  until  three  semi-annual  payments  are  overdue. 

When  mortgaged  farms  are  sold  at  auction,  the  sale 
must  be  public  and  the  land  is  sold  to  the  highest  bidder. 
The  small  holdings  institute  is  not  allowed  to  buy  the  land 
except  when  there  is  nobody  else  who  would  bid  a  price 
sufficient  to  cover  the  balance  of  the  loan,  overdue  install- 
ments, expenses,  and  so  on.  Out  of  the  selling  price  re- 
ceived at  the  auction,  there  are  first  paid  the  expenses  of 
the  execution  proceedings,  then  the  privileged  indebted- 
ness (such  as  unpaid  taxes  and  duties  to  three  years  back), 
and  lastly  in  succession  the  mortgagees  are  paid.  The 
institute  is  first  paid  because  it  holds  the  place  of  first 
mortgagee  in  the  land  register;  if  there  are  second  and  third 
mortgagees,  they  are  paid  in  succession.  After  paying  all 
these  expenses,  the  remainder  of  the  selling  price  goes  to 
the  debtor  whose  land  was  sold.  Should  the  new  purchaser 
desire,  he  can  assume  the  further  amortization  of  the  mort- 
gage loan,  in  which  case  the  institute  receives  in  cash  from 
the  selling  price  only  the  overdue  amortization  install- 
ments, the  interest  thereon,  and  expenses.    The  remainder 


Long-time  Credit  107 

of  the  loan  taken  over  by  the  buyer  is  in  that  case  deducted 
from  the  selling  price  of  the  mortgaged  farm. 

In  1912,  only  eleven  mortgages  were  foreclosed  and  173 
debtors  had  legal  proceedings  brought  against  them  out  of 
a  total  of  45,000  farms  mortgaged.  Of  the  farms  fore- 
closed, the  bank  held  only  three  in  1913. 

Since  its  establishment,  this  bank  has  made  66,264  loans 
on  mortgage  bonds  for  a  total  of  about  $72,000,000,  or 
an  average  of  nearly  $1,100  to  a  loan.  At  the  close  of  1912, 
the  institute's  claims  on  mortgage  loans  amounted  to 
$55,500,000.  The  institute  makes  loans  as  low  as  $75,  but 
it  does  not  guarantee  to  make  loans  exceeding  $10,000 
unless  the  requirements  of  all  persons  in  need  of  smaller 
loans  have  been  satisfied.  The  securities  for  the  institute's 
mortgage  bonds  and  debentures  consist  of  mortgages  on 
farms  valued  at  $121,250,000  and  reserve  funds  amounting 
to  $3,833,000.  The  losses  of  the  institute  have  been 
practically  nothing. 

3.  An  account  has  already  been  given  of  the  Hungarian 
Central  Cooperative  Credit  Society  which  was  organized 
primarily  to  promote  short-time  personal  credit  among 
members  of  cooperative  societies  organized  on  Raiffeisen 
principles.  This  institution  was  endowed  by  a  state  grant 
of  $250,000. 

The  demand  for  mortgage  credit,  however,  on  the  part 
of  owners  of  small  farms  having  increased  more  rapidly 
than  it  could  be  supplied  by  the  National  Small  Holdings 
Land  Mortgage  Institute,  loans  on  mortgage  payable  by 
amortization  were  granted  by  cooperative  societies  to 
their  members  on  bonds  of  various  kinds.  But  even  these 
advances  did  not  meet  the  growing  requirements  of  farmers 


108  Principles  of  Rural  Credits 

in  Hungary,  and  it  soon  became  necessary  to  make  other 
mortgage  loans  on  the  amortization  plan,  particularly  to 
small  farmers.  In  this  instance,  the  demand  was  that 
loans  be  made  for  sums  representing  at  least  two-thirds  of 
the  appraised  value  of  the  farm  lands. 

But  difficulty  was  experienced  in  securing  loans  for 
sums  corresponding  to  the  higher  proportion  of  the  ap- 
praised land  values.  In  fact,  small  farmers  found  greater 
difficulty  in  securing  loans  when  they  were  required  not 
for  acquiring  land,  but  for  paying  off  debts  at  a  high  inter- 
est with  which  many  farms  were  incumbered.  In  both 
cases  the  credit  required  is  not  strictly  material  credit, 
but  it  is  rather  more  like  personal  credit.  Loans  exceeding 
50  to  60  per  cent  of  the  appraised  value  of  farms  could 
only  with  safety  be  advanced  to  small  farmers  whose  per- 
sonal qualities,  farm  equipment,  and  all  particulars  as  to 
their  financial  circumstances  were  thoroughly  familiar  to 
the  creditor. 

For  the  object  of  satisfying  the  needs  of  small  farmers 
for  mortgage  credit  of  this  kind,  it  seemed  only  natural 
that  the  central  society  should  act  hand  in  hand  with  its 
affiliated  cooperative  societies.  About  the  year  1906,  the 
Hungarian  Central  Cooperative  Credit  Society  did  actually 
begin  to  grant  collective  loans  of  this  character,  the  method 
of  procedure  being  as  follows: 

The  local  society,  with  the  consent  of  the  central  in- 
stitute, votes  the  small  farmer  in  question  a  mortgage 
loan  repayable  by  uniform  annuities.  This  loan  may  not 
exceed  75  per  cent  of  the  appraised  value  of  the  farm  pur- 
chased by  him  or  which  he  desires  to  disincumber  of  debt 
already  on  his  land.     Part  of  the  loan  granted  by  such 


Long-time  Credit  109 

cooperative  society — in  no  case  more  than  50  per  cent  of 
the  farm's  value  in  question — may  be  ceded  to  one  of  the 
two  preceding  mortgage  credit  institutes,  but  preferably  to 
the  National  Small  Holdings  Land  Mortgage  Institute. 
This  part  of  the  loan  is  then  entered  in  the  land  registry 
with  priority  of  claim  in  the  manner  prescribed  by  the  act 
relating  to  mortgage  bonds.  The  remainder  of  the  loan  is 
ceded  with  deferred  claim  to  the  Hungarian  Central  Co- 
operative Credit  Society.  The  small  holder  stands  as 
debtor  to  his  own  cooperative  society,  to  which  he  must 
repay  the  loan  in  equal  annual  installments.  These  annual 
payments  are  forwarded  to  the  central  society  which  di- 
vides the  annuities  and  transmits  to  the  land  mortgage 
institute  the  part  which  is  its  due.  This  system  renders  it 
possible  for  the  small  farm  owner  to  obtain  a  comparatively 
large  loan  on  easy  terms  on  mortgage  bonds.  Loans  of  this 
kind  may  be  repaid  by  the  debtor  at  any  time  either  in  in- 
stallments or  in  a  lump  sum.  Experience  has  shown  that 
small  farmers  in  Hungary  rarely  need  mortgage  loans  longer 
than  ten  to  twenty  years.  From  September,  1905,  to  the 
close  of  1912  the  affiliated  societies,  in  cooperation  with 
the  central  society,  have  advanced  more  than  $16,500,000 
in  collective  mortgage  loans  on  farms  comprising  185,335 
acres. 

4.  The  desire  for  land  ownership  among  small  farmers 
in  Hungary,  which  has  been  designated  as  "land  hunger," 
often  led  them  to  purchase  additional  farms  under  condi- 
tions which  later  involved  some  of  them  in  ruin.  As  a 
means  of  encouraging  farm  ownership  among  this  class  and 
of  protecting  them  from  unwise  ventures,  the  government 
aided  in  the  endowment  of  another  altruistic  mortgage 


110  Principles  of  Rural  Credits 

credit  institute  in  1911.  This  is  known  as  the  National 
Federation  of  Hungarian  Land  Mortgage  Institutes,  which 
was  founded  in  conjunction  with  the  two  land  mortgage 
institutes  previously  mentioned  and  with  the  Hungarian 
Central  Cooperative  Credit  Society.  The  state  con- 
tributed $2,000,000  towards  its  foundation,  and  the  three 
institutes  mentioned  contributed  together  $1,750,000 
more.  Besides  the  $2,000,000  endowment,  the  govern- 
ment may  place  out  of  its  resources  at  the  disposal  of 
the  institute  $2,500,000  worth  of  various  securities  for 
the  purpose  of  creating  a  guaranty  fund  as  security  for  the 
debentures  issued  by  the  institute.  Its  administrative 
and  working  expenses  are  also  within  certain  limits  borne 
by  a  state  settlement  fund.  The  expert  work  done  in  con- 
nection with  the  institute's  transactions  is  performed  free 
of  charge  by  officials  of  the  ministry  of  agriculture.  The 
institute  enjoys  the  same  exemption  from  taxes  and  dues 
as  the  central  cooperative  credit  society;  and,  in  carrying 
out  its  land  settlement  policy,  the  parties  concerned  also 
are  exempted  from  the  payment  of  certain  dues. 

Several  very  important  duties  are  assigned  to  the  Na- 
tional Federation  of  Hungarian  Land  Mortgage  Institutes. 
One  duty  is  to  assist  people  with  little  or  no  means  who 
are  engaged  in  farm  work.  It  does  this  by  supplying  the 
purchase  price  of  common  pastures  bought  by  parishes  so 
that  the  poorer  farm  laborers  or  small  farmers  may  keep 
their  cows,  horses  or  pigs  cheaply  during  the  six  months 
of  summer  and  autumn.  In  many  instances,  these  animals 
not  only  help  to  maintain  the  farmer's  family,  but  a  cer- 
tain amount  of  money  is  also  sometimes  raised  by  the  sale 
of  young  animals. 


Long-time  Credit  111 

Mortgage  loans  are  also  granted  to  parish  and  county 
councils  for  the  erection  of  farm  laborers'  dwellings,  to 
which  a  small  piece  of  land  is  attached  varying  in  size  from 
one-sixth  to  one-fourth  of  an  acre.  These  holdings  the 
farm  laborers  may  purchase  on  easy  terms.  This  renders 
it  possible  for  them  to  live  in  their  own  homes,  and  ex- 
perience has  shown  that  these  homes  have  a  remarkably 
favorable  effect  on  the  minds  of  the  poorer  classes  of  rural 
communities. 

The  institute  also  acquires  estates  from  large  pro- 
prietors, prelates  and  real  estate  owners  which  it  parcels 
out  in  conformity  to  the  needs  of  farmers  in  the  respective 
districts.  In  these  transactions  the  institute  practically 
only  covers  its  expenses.  But,  by  selling  these  lots  on 
mortgage,  it  creates  new  farm  holdings  and  thus  makes  it 
possible  for  the  industrious  farming  classes  to  own  their 
farms  and  increase  their  wealth.  The  plans  regarding  land 
policy  transactions  are  subject  to  the  approval  of  the 
minister  of  agriculture,  while  the  conditions  relating  to 
credit  transactions  are  determined  by  the  said  institute 
in  conjunction  with  the  ministers  of  finance  and  agri- 
culture. 

The  institute  did  not  begin  its  activity  until  1911.  Dur- 
ing 1912  it  purchased  twenty-one  estates  comprising  18,500 
acres,  of  which  the  institute  sold  on  mortgage  10,400  acres 
to  1,001  purchasers.  Two  large  estates,  consisting  of 
23,700  acres,  were  also  leased  by  the  institute,  were  cut 
up  into  farms  of  various  sizes,  and  were  subleased  to  1,930 
farmers.  The  institute  also  took  over  the  management  of 
a  manor  farm  comprising  33,000  acres,  on  which  8,443 
lessees  were  engaged  in  farming  in  150  different  parishes. 


112  Principles  of  Rural  Credits 

Moreover,  the  institute  granted  to  29  parishes  mortgage 
loans  amounting  to  $950,000  for  the  acquirement  of 
pastures,  as  well  as  loans  to  four  parishes  and  one  munic- 
ipality for  the  erection  of  farm  laborers'  dwellings. 

In  all  these  transactions,  the  National  Federation  of 
Hungarian  Land  Mortgage  Institutes  makes  no  charge  for 
negotiation,  legal  expenses,  or  surveying;  in  fact,  in  all 
lines  of  its  activity  it  continues  to  aid  its  clients  in  business 
matters  free  of  charge.  The  institute  also  takes  care  that 
the  farmers  manage  their  farms  in  such  a  manner  as  to 
insure  them  the  largest  possible  income.  By  putting  large 
estates  on  the  market  in  small  and  medium-size  farms,  this 
institute  is  helping  to  solve  the  problem  of  more  production 
and  is  enabling  a  greater  number  of  farmers  to  own  their 
own  farms.  These  efforts  also  have  a  tendency  to  pre- 
vent any  confusion  which  might  arise  from  a  sudden 
change  in  the  present  conditions  of  land  tenure  in 
Hungary. 

The  loans  required  by  farmers  for  purchasing  lots  sold 
by  this  institute  are  advanced  in  the  first  instance  by  the 
local  societies  affiliated  with  the  Hungarian  Central  Co- 
operative Credit  Society.  In  return  for  an  entry  in  the 
land  registry  with  priority  of  claim,  the  local  societies  cede 
the  loans  to  some  land  mortgage  institute;  in  return  for 
an  entry  with  deferred  (second)  claim,  they  cede  them  to 
the  national  federation;  and,  finally,  in  return  for  a  deferred 
(third)  claim,  they  cede  them  to  the  central  credit  society. 
The  manipulation  of  these  collective  loans  is  carried  out 
by  the  last-named  institute.  Loans  of  this  kind  may  not 
exceed  75  per  cent  of  the  purchase  price  of  the  estate. 
The  money  required  for  the  part  of  such  loans  falling  to 


Long-time  Credit  113 

its  share  is  obtained  by  the  national  federation  institute 
by  the  issue  of  debentures. 

While  the  bulk  of  the  capital  of  the  National  Federation 
of  Hungarian  Land  Mortgage  Institutes  was  the  gift  of 
the  state,  the  government  does  not  own  the  institute.  At 
general  meetings  the  state  cannot  have  more  votes  than 
the  other  founders  together.  However,  in  view  of  the 
fact  that  the  institute's  activities  are  seriously  concerned 
with  the  land  policies  of  the  government,  the  legislature 
has  insured  the  government  a  somewhat  greater  influence 
over  it  than  with  the  other  altruistic  mortgage  banks. 
This  influence  is  exercised  as  follows: 

The  president,  one  member,  and  one  supernumerary 
member  of  the  board  of  directors  are  appointed  by  the 
minister  of  finance;  and  the  vice-president,  one  member, 
and  one  supernumerary  member  of  the  said  board  are 
appointed  by  the  minister  of  agriculture.  These  members 
of  the  board  of  directors  are  delegated  from  among  the 
officials  of  the  respective  ministries.  But  these  official 
representatives  form  a  minority  of  the  board  only.  They, 
however,  may  suspend  the  resolutions  of  the  board  by 
protest,  in  which  case  the  decision  rests  with  the  govern- 
ment. To  conform  with  its  peculiar  objects,  the  organiza- 
tion of  this  institute  is  neither  a  joint^stock  company  nor 
a  cooperative  society.  Its  members  may  consist  only  of 
state  officials,  representatives  of  the  three  altruistic  insti- 
tutions concerned  in  its  foundation,  and  such  persons  who 
subscribe  for  founders'  shares,  the  value  of  which  is  $25,000 
each.  The  owners  of  shares  are  not  entitled  to  recall  their 
capital  at  any  time  during  the  existence  of  the  institute, 
nor  can  they  transfer  theif  shares  without  the  consent  of 


114  Principles  of  Rural  Credits 

the  board  of  directors  and  the  minister  of  finance.  Only  in 
case  either  of  the  institutes  concerned  in  the  foundation 
has  to  be  dissolved  can  any  exception  be  made  to  this  rule. 
No  founders'  shares  are  entitled  to  more  than  4  per  cent 
dividend. 

The  issue  of  mortgage  bonds  by  these  four  types  of 
institutions  is  governed  by  law  which  provides  that  a 
special  reserve  fund  must  be  created  which  shall  represent 
at  least  5  per  cent  of  the  value  of  the  mortgage  bonds 
issued  and  must  in  any  case  amount  to  at  least  $100,000. 
If  either  of  these  mortgage  institutes  desires  that  its  bonds 
should  be  tax  free  and  enjoy  the  privilege  of  being  accepted 
as  investments  for  trust  funds,  the  special  reserve  fund 
must  amount  to  not  less  than  $750,000.  Such  reserve 
fund  serves  exclusively  as  a  security  for  the  owners  of 
mortgage  bonds  as  a  body,  and  no  other  person  or  institu- 
tion can  have  any  claim  on  it  until  the  claims  of  mortgage 
bondholders  have  been  satisfied.  The  law  enumerates 
the  securities  in  which  such  a  reserve  fund  may  be  in- 
vested. 

But  mortgage  bonds  may  only  be  issued  for  loans  which 
do  not  exceed  50  per  cent  of  the  appraised  value  of  the 
farms  mortgaged.  The  mortgages  serve  as  security  for  the 
totality  of  mortgage  bonds  issued.  The  law  stipulates 
that  these  institutions  shall  submit  to  the  court  and  pub- 
licly advertise  a  detailed  statement  of  accounts  every  six 
months.  In  certain  cases  the  law  entitles  mortgage  bond- 
owners  to  demand  an  order  of  the  court  for  the  examina- 
tion by  experts  of  the  management  of  the  business  of  any 
particular  mortgage  credit  institute. 

To  facilitate  the  purchase  and  development  of  small 


Long-time  Credit  115 

farms,  the  Hungarian  legislature  authorized  the  mort- 
gage banks,  under  certain  prescribed  conditions,  to  issue 
not  mortgage  bonds,  but  bank  debentures  on  the  basis 
of  loans  advanced  for  the  purpose  of  purchasing  estates 
and  breaking  them  up  into  small  farms.  With  debentures, 
loans  can  be  made  up  to  two-thirds  of  the  appraised  value 
of  the  property.  The  legislature  endeavored  to  secure 
the  safety  of  these  debentures  as  an  investment  by  making 
their  issuance  dependent  upon  conditions  to  all  intents 
and  purposes  quite  as  severe  as  those  controlling  the  issue 
of  mortgage  bonds.  Though  not  available  as  investments 
for  trust  funds,  mortgage  debentures  are  declared  by  law 
as  suitable  for  all  other  purposes  of  investment,  and  they 
are  exempted  from  taxation  the  same  as  mortgage  bonds. 

Loans  on  mortgage  bonds  and  debentures  are  usually 
granted  for  a  period  of  fifty  years  and  are  repayable  by 
semi-annual  amortization  installments.  These  payments 
generally  include  the  part  of  the  principal  due,  the  interest, 
and  a  small  sum  to  cover  working  expenses.  The  mort- 
gage institutes  reserve  the  right  to  recall  loans  when  the 
debtor  does  not  fulfill  his  obligations  punctually  or  when 
the  value  of  the  farm  property  has  decreased  to  such  an  ex- 
tent as  to  endanger  the  repayment  of  the  loan.  When  the 
debtor  elects  to  repay  the  loan  either  in  part  or  in  a  lump 
sum,  which  he  has  a  right  to  do  at  any  time  instead  of 
abiding  by  the  original  amortization  plan,  he  is  usually 
bound  to  pay  a  certain  additional  compensation.  This 
amount  differs  with  the  various  mortgage  institutes,  but 
as  a  rule  it  does  not  exceed  2  or  3  per  cent  of  the  sum  re- 
deemed in  this  manner. 

The  mortgage  bonds  and  the  debentures  secured  by 


116  Principles  of  Rural  Credits 

mortgage  are  secured  by  the  totality  of  the  farm  mort- 
gages. By  the  law  each  institute  is  bound  to  take  care 
that,  if  the  amount  of  outstanding  loans  decreases,  a 
sufficient  number  of  mortgage  bonds  or  debentures  shall 
be  withdrawn  from  circulation  by  an  extraordinary  draw- 
ing to  provide  for  the  total  nominal  value  of  the  mortgage 
bonds  or  debentures  not  exceeding  the  total  amount  of 
claims  on  loans. 

These  different  mortgage  credit  institutes  are  supposed 
to  pay  their  borrowers  in  mortgage  bonds  or  debentures. 
As  a  matter  of  fact,  however,  instead  of  handing  over 
securities  and  leaving  it  to  the  debtors  to  sell  them  where 
and  how  they  can  best  do  so,  these  institutes  reserve  to 
themselves  the  right  of  realizing  the  securities.  As  this 
generally  involves  expense  and  a  slight  decrease  in  market 
price  on  the  nominal  value  of  bonds  or  debentures,  the 
bank  usually  deducts  a  certain  percentage  to  cover  losses 
and  expenses.  In  the  case  of  these  altruistic  institutes, 
this  deduction  is  barely  in  excess  of  the  actual  loss  in- 
curred by  the  sale  of  the  bonds  or  debentures,  whereas 
with  joint-stock  banks  the  practice  is  to  give  the  debtor 
from  X}/2  to  3  per  cent  less  than  their  market  value. 

While  mortgage  loans  advanced  by  these  four  types 
of  credit  institutions  are  not  confined  to  farm  properties, 
still  the  statistics  show  that  the  latter  greatly  preponder- 
ate. In  1911  the  total  outstanding  claims  on  mort- 
gage loans  by  these  banks  amounted  to  $944,000,000,  of 
which  nearly  $614,000,000  had  been  loaned  on  farm 
properties.  At  the  same  time,  the  said  institutes  had 
nearly  $634,000,000  worth  of  mortgage  bonds  in  circula- 
tion.   These  figures,  however,  do  not  include  the  mort- 


Long-time  Credit  117 

gage  loans  advanced  by  the  cooperative  societies  under 
the  control  of  the  Hungarian  Central  Cooperative  Credit 
Society,  which  loans  are  practically  confined  to  small  and 
medium-size  farms. 

Russia 

Russia  has  endowed  two  types  of  land-mortgage  banks 
for  aiding  both  peasants  and  the  nobility  to  secure  better 
credit  facilities. 

The  Peasants  Land-Mortgage  Bank  was  established  by 
the  government  about  1882  for  the  purpose  of  enabling 
villages  and  communes  to  acquire  land.  Under  this 
system,  a  village  group  of  peasants  would  apply  to  the 
bank  for  money  to  purchase  land  from  the  landlords,  the 
entire  community  being  held  responsible  for  the  loan.  The 
payments  were  divided  among  the  members  of  the  com- 
munity in  proportion  to  the  ability  of  each  family  to  pay. 

About  1895  this  bank  was  granted  special  capital  by 
the  government  with  which  to  purchase  estates  of  land- 
lords, divide  them  up  into  small  farms,  and  sell  the  farms 
to  individuals.  The  bank  also  loaned  money  to  individual 
peasants,  holding  them  individually  liable.  By  this  policy 
the  Peasants  Land-Mortgage  Bank,  as  the  instrument  of 
the  government,  aimed  to  establish  peasant  ownership 
in  the  place  of  community  ownership,  with  the  peasants 
living  on  their  own  farms.  The  farms  established  by  the 
Peasants  Land-Mortgage  Bank  vary  materially  in  size 
in  different  parts  of  Russia,  the  general  average  being 
from  21  to  27  acres,  though  in  some  places,  as  in  the  Gov- 
ernment of  Kharkov,  the  peasant  farms  are  as  large  as 
80  acres. 


118  Principles  of  Rural  Credits 

Between  the  years  1907  and  1912,  some  16,000,000 
acres  of  land  had  been  purchased  by  the  peasant  bank, 
making  a  total  of  about  37,000,000  acres  purchased  during 
the  thirty  years  of  its  existence.  About  75  per  cent  of  all 
sales  of  land  for  farms  by  the  land-mortgage  banks  in 
Russia  is  now  made  to  farmers  directly,  the  balance  of 
sales  still  being  made  to  villages  and  communes. 

In  1906,  it  was  agreed  that  all  lands  granted  to  the 
peasants  at  the  time  of  their  liberation  from  serfdom  in 
1862  should  be  considered  as  having  been  paid  for,  and 
the  peasants  were  then  allowed  to  mortgage  this  land 
which  hitherto  had  been  forbidden  them  to  do.  Mort- 
gage credit  was  granted  to  them  by  the  peasant  bank 
on  fairly  liberal  terms.  The  general  policy  is  to  establish 
a  period  of  repayment  extending  over  55^  years.  The 
rate  of  repayment  allowed  to  peasants,  which  includes 
the  annual  amortization  payments,  interest,  cost  of  ad- 
ministration, and  other  expenses,  amounts  to  only  4^ 
per  cent.  Any  costs  above  this  rate  are  paid  by  the  govern- 
ment. Moreover,  the  peasants  can  also  borrow  money  of 
the  government,  the  funds  for  this  purpose  being  secured 
by  the  issue  of  bonds.  The  net  interest  rate  on  these 
bonds  frequently  amounts  to  5  or  6  per  cent,  so  that  the 
government  aid,  while  not  costly,  is  of  material  benefit  to 
the  peasant  farmers  in  Russia. 

In  addition  to  this  type  of  land-mortgage  bank,  there 
was  also  established  in  1882  the  Nobility  Land-Mortgage 
Bank.  This  institution  does  business  only  with  the  no- 
bility, the  purpose  being  to  grant  mortgage  loans  on  their 
farm  lands.  The  same  foundation  capital  was  granted 
by  the  government  for  the  endowment  of  this  bank,  and 


Long-time  Credit  119 

it  conducts  business  with  noblemen  in  the  same  way  and 
on  the  same  terms  that  the  land-mortgage  bank  does 
with  the  peasants. 

While  this  bank  was  established  strictly  for  the  nobility, 
there  has  been  some  modification  in  recent  years.  Now 
persons  who  have  purchased  land  of  the  nobility  which 
had  been  mortgaged  by  this  bank  have  the  privilege  of 
settling  the  mortgage  on  the  property  purchased  within 
10  years.  In  fact,  by  recent  consolidation  of  their  ac- 
tivities, the  Peasants  Land-Mortgage  Bank  and  the  No- 
bility Land-Mortgage  Bank  are  practically  one  institution, 
though  it  maintains  separate  departments  for  conducting 
business  with  these  two  classes. 


CHAPTER  VII 

NON-COOPERATIVE   FARM   MORTGAGE   OR 
LONG-TIME   CREDIT— Continued 

B — Farm  Mortgage  Credit  by  Joint-Stock  and 

Savings  Banks 

The  ordinary  joint-stock  or  commercial  banks,  which 
are  associations  of  lenders  organized  for  profit-making, 
as  well  as  the  different  classes  of  savings  banks,  have  ex- 
tended their  mortgage  credit  to  farmers  in  many  European 
countries.  In  many  instances,  the  percentage  of  mortgage 
loans  on  farms  and  other  rural  properties  is  not  large  as 
compared  with  the  total  amount  of  business  done  by  these 
banks.  But  the  importance  of  agriculture  and  the  in- 
creasing security  of  farm  loans  have  made  this  kind  of 
investment  much  sought  after  in  recent  years  by  various 
banks  and  even  by  large  insurance  societies,  so  that  the 
amount  of  farm  mortgage  business  is  gradually  increasing. 
As  a  rule,  however,  these  kinds  of  banks  operate  in  dis- 
tricts where  there  are  no  cooperative,  provincial,  or  state- 
endowed  banks,  since  they  could  hardly  compete  with  the 
latter  banks,  with  their  lower  rates  of  interest  and  often 
gratuitous  services  in  behalf  of  farmers,  and  continue  to 
pay  satisfactory  dividends  on  their  shares.  Some  facts, 
therefore,  in  regard  to  the  work  of  these  banks  among 
farmers  are  well  worthy  of  mention. 

120 


Long-time  Credit  121 

LOANS   BY  JOINT-STOCK   AND    SAVINGS-BANKS 

Germany 

There  are  in  Germany  thirty-eight  joint-stock  mort- 
gage banks  organized  under  the  provisions  of  the  imperial 
mortgage  bank  act  of  1899.  Any  bank  of  this  kind  is 
free  to  extend  its  business  over  any  part  of  the  kingdom. 
The  business  of  these  banks  has  greatly  developed  during 
the  past  thirty  years.  The  total  of  their  outstanding 
mortgage  loans  in  1911  was  some  $2,750,000,000.  But 
of  this  enormous  sum  only  6  per  cent,  or  $165,000,000,  had 
been  loaned  on  farm  mortgages. 

The  law  under  which  these  banks  operate  has  laid  down 
special  regulations  regarding  mortgage  loans  on  farms. 
The  act  requires  that  when  bonds  are  issued  upon  the 
security  of  farm  mortgages,  at  least  half  the  total  amount 
of  this  class  of  loans  advanced  by  any  bank  must  be  made 
subject  to  amortization  or  sinking-fund  payments  of  not 
less  than  one-fourth  of  one  per  cent.  As  a  matter  of  fact, 
the  larger  number  of  banks  require  such  amortization 
payments  on  all  their  farm  loans  and  have  fixed  the  mini- 
mum sinking-fund  payment  at  3^  per  cent. 

Farm  mortgagors  are  also  accorded  the  right,  under  the 
sinking-fund  plan,  to  repay  their  loans  in  whole  or  in  part 
before  the  close  of  the  stipulated  period,  and  may  only 
waive  such  right  for  a  period  not  exceeding  ten  years  from 
the  date  of  loan.  By  the  law,  no  agreement  permitting 
a  bank  to  call  in  a  loan  is  valid.  Minimum  loans  are 
fixed  by  some  banks,  and  the  maximum  loans  may  not 
exceed  three-fifths  of  the  appraised  value  of  the  farm  ex- 
cept when  the  state  or  province  concurs,  in  which  case 


122  Principles  of  Rural  Credits 

loans  may  be  granted  to  two-thirds  the  value.  Loans  are 
made  on  first  mortgage  only  and  must  be  paid  in  cash  as 
a  rule,  payment  in  bonds  being  permissible  only  when  the 
bank's  constitution  expressly  permits  it  and  the  borrower 
also  consents.  In  the  latter  case,  specific  authorization 
must  be  entered  in  the  contract  that  the  borrower  may 
repay  in  cash  or  in  bonds  of  the  bank  at  his  discretion. 

Bonds  are  issued  of  various  denominations  ranging  from 
$25  to  $1,250.  The  bonds  of  joint-stock  mortgage  banks 
are  not  recognized  as  trustee  investments  except  in  the 
special  case  of  six  mortgage  banks  in  Bavaria;  but  almost 
without  exception  they  are  accepted  as  first-class  security 
by  the  German  Imperial  Bank.  Mortgage  bonds  may 
be  issued  up  to  fifteen  times  the  amount  of  the  bank's 
paid-up  capital  and  reserves;  under  special  circumstances 
twenty  times  the  amount  is  permitted. 

According  to  the  law,  every  mortgage  bank  is  obliged 
to  publish  in  the  Official  Gazette  and  in  the  newspapers 
selected  for  its  regular  advertisements  detailed  statements 
twice  a  year  showing  its  financial  condition. 

Savings-banks  in  Germany  are  very  important  for  grant- 
ing mortgage  credit  to  farmers.  In  1910  their  total  in- 
vestments in  farm  mortgages  were  estimated  at  about 
$850,000,000.  They  are  preeminently  the  sources  of  mort- 
gage credit  for  small  and  medium-size  farmers,  whom  they 
accommodated,  especially  in  western  Germany,  at  a  time 
when  no  other  mortgage  banks  were  open  to  them.  In 
effect,  the  savings-banks  now  provide  nearly  every  district 
with  a  source  of  mortgage  credit  for  farmers. 

The  larger  part  of  savings-banks  in  Germany  are  es- 
tablished, managed,  or  supervised  and  guaranteed  by  the 


Long-time  Credit  123 

communal,  district,  or  urban  authorities  where  they  are 
located.  Apart  from  these  public  authorities,  the  savings- 
banks  have  no  legal  standing.  At  the  end  of  1910  there 
were  2,844  public  savings-banks  in  Germany,  not  includ- 
ing those  in  Brunswick,  with  7,404  branches  or  agencies, 
and  228  other  savings-banks  with  294  branches  or  agencies. 
The  total  deposits  of  all  these  banks  amounted  to  about 
$4,200,000,000,  and  a  great  part  of  this  money  is  open  to 
the  credit  of  farmers.  The  interest  paid  on  deposits  ranges 
from  3  to  4  per  cent  with  the  different  banks,  and  these 
comparatively  high  interest  rates  on  deposits  make  the 
rates  on  farm  mortgages  somewhat  higher  than  with  many 
other  kinds  of  mortgage  banks.  In  1909,  about  36  per 
cent  of  mortgage  loans  made  by  savings-banks  were  at  4 
per  cent,  while  56  per  cent  were  more  than  4  but  not  ex- 
ceeding 5  per  cent. 

So  far  as  farm  mortgage  credit  is  concerned,  the  savings- 
banks  are  at  a  disadvantage.  Loans  are  liable  to  be  re- 
called because,  under  certain  circumstances,  savings-banks 
have  to  be  in  a  position  to  realize  their  assets  at  short  no- 
tice. Moreover,  they  reserve  the  right  to  raise  the  rate  of 
interest  on  loans  in  order  not  to  become  losers  in  the  event 
of  an  increase  in  rates  paid  on  deposits.  The  same  diffi- 
culty occurs  in  the  case  of  savings-banks  making  mortgage 
loans  on  the  amortization  plan.  In  recent  years,  however, 
this  difficulty  has  been  partly  met  by  means  of  other  funds 
than  deposits,  so  that  there  has  been  a  considerable  in- 
crease in  the  volume  of  farm  mortgage  loans  granted  on 
the  sinking-fund  plan.  In  1909  nearly  25  per  cent  of  out- 
standing farm  mortgage  loans  granted  by  Prussian  savings- 
banks  were  made  on  these  conditions. 


124  Principles  of  Rural  Credits 

Most  savings-banks  restrict  their  mortgage  loans  to 
farms  within  their  own  or  neighboring  districts.  On  farms 
not  within  such  limits,  less  money  is  generally  loaned  in 
proportion  to  the  appraised  value  of  the  property.  A 
Prussian  ministerial  order  provides  that  the  lending  of 
money  by  a  savings-bank  outside  its  customary  area  is 
only  permissible  when  a  fixed  period  of  redemption  is 
stipulated  and  when  such  mortgages  do  not  exceed  one- 
fourth  of  its  total  mortgage  investments.  Under  these 
circumstances,  much  of  the  money  deposited  with  the 
savings-banks  in  particular  areas  is  thus  ready  for  invest- 
ment within  the  same  areas.  The  usual  limit  for  mort- 
gage loans  on  farms  fixed  by  savings-banks  is  from  one- 
half  to  two-thirds  of  the  appraised  value.  Many  banks, 
however,  with  a  view  of  encouraging  the  creation  of  small 
farms,  make  loans  up  to  three-fourths  or  even  five-sixths 
of  the  value  of. newly  purchased  farms  within  their  dis- 
tricts, provided  that  at  least  one-half  per  cent  of  the 
capital  is  to  be  repaid  annually.  Under  special  circum- 
stances, this  amortization  payment  may  be  waived  for  a 
period  of  two  years. 

The  spread  of  these  communal  and  district  savings- 
banks  for  serving  the  mortgage  needs  of  the  rural  popula- 
tion has  been  promoted  by  the  central  authorities,  espe- 
cially those  who  are  responsible  for  agricultural  matters. 
They  have  also  urged  these  banks  to  adapt  their  conditions 
of  making  loans  to  suit  the  needs  of  farmers.  A  special 
advantage  of  these  banks  is  that  they  provide  farmers 
with  a  public  mortgage  credit  institution  in  their  own 
vicinity  and  they  facilitate  personal  relations  between 
borrower  and  lender.    As  a  result  of  its  special  knowledge 


Long-time  Credit  125 

of  local  conditions  and  land  values,  a  savings-bank  can 
generally  dispense  with  a  special  valuation  and  save  its 
costs.  The  expense  of  supervision  can  also  be  saved.  For 
the  small  farmer  the  procedure  is  much  simpler  and  less 
costly  than  when  bonds  have  to  be  marketed  and  other 
formalities  satisfied.  By  these  means  the  savings-banks 
in  Germany  have  aided  mortgage  credit  greatly  among 
farmers. 

Austria-Hungary 

For  the  promotion  of  credit  among  farmers  in  both 
Austria  and  Hungary,  the  legislatures  of  the  respective 
countries  endowed  the  Austro-Hungarian  Bank  with  the 
privilege  of  granting  mortgage  loans,  of  issuing  mortgage 
bonds,  and  of  exercising  the  same  favors  granted  to  the 
public  land-mortgage  institutes  previously  outlined.  How- 
ever, the  mortgage  loans  of  this  bank  were  limited  to 
$75,000,000,  of  which  amount  the  bank  can  appropriate 
three-fifths,  or  $45,000,000,  for  loans  on  farm  real  estate. 

In  mortgage  loans  to  farmers,  joint-stock  and  savings- 
banks  in  Hungary  far  exceed  the  advances  of  any 
other  class  of  banks.  In  1911,  these  banks  had  loaned 
$743,000,000  on  mortgages,  of  which  nearly  $445,000,000 
had  been  advanced  in  mortgage  loans  for  agricultural 
purposes.  The  joint-stock  credit  banks  almost  without 
exception  show  a  great  preference  for  the  issue  of  mortgage 
bonds  and  debentures,  though  only  in  the  case  of  a  very 
small  proportion  can  they  be  described  as  predominantly 
mortgage  credit  banks.  The  larger  part  of  these  banks 
engage  in  all  branches  of  credit  business  and  commercial 
banking.    In  1911,  the  number  of  these  joint-stock  banks 


126  Principles  of  Rural  Credits 

in  Hungary  alone  amounted  to  1,869.  The  nominal  value 
of  mortgage  bonds  issued  by  these  banks  which  were  in 
circulation  that  year  was  nearly  $471,000,000. 

A  considerable  business  in  farm  mortgage  loans  is  also 
done  by  the  rural  banks,  which  are  usually  called  "savings- 
banks,"  though  in  reality  they  can  hardly  be  regarded  as 
such.  In  Hungary,  the  acceptance  of  savings  deposits  by 
a  bank  is  not  subject  to  any  kind  of  concession;  nor  is  the 
management  of  the  affairs  of  savings-banks  subject  to  any 
sort  of  legal  restrictions.  The  savings-banks  are  joint- 
stock  companies  exactly  similar  to  other  banks,  and  it  is 
left  to  their  discretion  to  engage  in  any  branch  of  banking 
just  as  other  banks  do.  The  latter,  almost  without  ex- 
ception, also  accept  savings  deposits.  This  far-reaching 
liberalism  of  the  Hungarian  mercantile  law  has,  no  doubt, 
become  the  source  of  many  evils,  particularly  as  the  sav- 
ings deposits  of  rural  banks  are  frequently  invested  in 
loans  not  easily  recalled  and  of  a  risky  nature.  But  this 
freedom  of  action  has  been  an  undoubted  blessing  to 
agriculture.  As  a  result  of  competition,  the  country  banks 
are  obliged  to  pay  on  savings  deposits  far  too  high  a  rate 
of  interest  to  allow  of  their  lending  these  deposits  to 
farmers  at  a  low  interest  rate.  But  even  this  money  from 
country  banks  is  always  cheaper  than  loans  from  private 
capitalists.  From  the  point  of  view  of  mortgage  loans  on 
farms,  this  money  has  been  practically  indispensable  not- 
withstanding the  great  development  of  banks  issuing 
mortgage  bonds. 

The  usual  method  employed  by  rural  savings-banks 
which  advance  mortgage  loans  to  farmers  in  Hungary  is 
to  require  six  months'  bills  that  are  prolonged  for  certain 


Long-time  Credit  127 

periods,  which  are  either  determined  beforehand  or  are 
left  indeterminate,  and  to  secure  their  claims  by  a  mort- 
gage entry  in  the  land  register. 

This  kind  of  mortgage  loan  is  certainly  a  danger  to 
farmers  owing  to  its  being  recallable.  But  in  practice  the 
danger  is  not  so  great  as  one  might  imagine,  although 
about  three-fourths  of  the  loans  of  country  savings-banks 
are  of  this  character.  It  does  sometimes  happen,  particu- 
larly during  financial  crises,  that  some  savings-banks  call 
in  their  mortgage  loans;  but  this  is  the  exception  rather 
than  the  rule.  In  general,  the  mortgage  loans  to  small 
farmers  made  by  the  savings-banks  are  acknowledged  to 
be  the  safest  kind  of  investment.  The  number  of  country 
savings-banks  in  Hungary  is  so  large  that,  if  one  of  them 
recalls  a  mortgage  loan  of  this  kind,  some  other  bank  is 
always  ready  to  take  over  the  claims.  In  critical  times 
this  is  often  done  with  the  assistance  of  some  big  bank,  or 
even  with  the  help  of  the  government  itself  when  the  notice 
of  recall  given  by  the  country  savings-bank  involves  the 
interests  of  a  large  number  of  farmers.  As  a  general  prin- 
ciple, this  state  of  things  is  certainly  open  to  objections; 
but,  as  a  matter  of  fact,  there  has  been  a  decrease  in  the 
number  of  recallable  loans  granted  by  country  savings- 
banks  during  the  past  thirty  or  forty  years. 

Italy 

There  are  four  mortgage  credit  institutions  granting 
farm  mortgage  credit  in  Italy,  namely,  the  Italian  Land 
Credit  Institute  at  Rome,  the  St.  Paul  Institute  of  Charity 
Organizations  at  Turin,  the  Monte  dei  Paschi  at  Siena, 
and  the  Sardinia  Land  Credit  Bank  at  Cagliari.     The 


128  Principles  of  Rural  Credits 

cooperative  farm  mortgage  credit  s}^stem  does  not  exist 
in  Italy.  By  royal  decree,  however,  certain  institutions 
may  deal  in  farm-land  credit,  among  which  may  be  men- 
tioned landowners'  mutual  societies  which  own  real  estate 
the  value  of  which  is  not  less  than  $1,000,000,  institutions 
and  societies  whose  paid-up  capital  amounts  to  $2,000,000, 
and  also  similar  organizations  whose  capital  amounts  to 
more  than  $400,000  if  they  are  located  in  districts  where 
no  farm-land  credit  institution  exists. 

These  banks  are  supervised  under  the  most  minute 
statutory  regulations.  They  are  permitted  to  grant  loans 
on  first  mortgage  to  a  maximum  of  half  the  value  of  the 
real  property,  the  loans  to  be  extinguishable  on  the  amorti- 
zation plan  for  periods  of  not  less  than  ten  nor  more  than 
fifty  years.  These  annual  payments  must  include  the 
amortization  installment,  interest,  income  tax,  commis- 
sion, management  expenses,  and  the  mortgagor's  share 
of  revenue  and  stamp  duties  which  are  paid  directly  on 
his  behalf  by  the  institutions.  The  debtor,  however,  may 
pay  off  the  whole  or  any  part  of  the  mortgage  at  any  time 
within  the  term  of  the  loan. 

The  banks  obtain  the  funds  necessary  to  carry  on  these 
operations  by  the  issue  of  mortgage  bonds  which  bear 
interest  at  varying  rates— 3^,  3%,  4,  4J/£,  and  5  per  cent 
— being  designed  to  lessen  money-market  fluctuations. 
The  interests  of  bondholders  are  protected  by  the  fact 
that  all  the  bonds  issued  are  guaranteed  by  the  total 
mortgages  held. 

Besides  the  farm  mortgage  credit  institutes,  there  are 
three  large  savings-banks,  those  of  Milan,  Bologna  and 
Verona,  which  advance  loans  on  farm  mortgages.     The 


Long-time  Credit  129 

first  two  may  conduct  business  in  any  part  of  the  kingdom 
of  Italy,  while  the  last  named  is  limited  to  the  Venetian 
provinces  and  Mantua. 

In  Italy  there  is  a  fundamental  difference  between  a 
commercial  bank  and  these  savings-banks.  The  commer- 
cial bank  obtains  its  capital  from  the  shares  subscribed 
by  shareholders;  whereas  the  savings-banks  are  founded 
with  donations  made  by  the  communes  and  provinces  as 
well  as  by  benefactors'  foundations.  They  are,  therefore, 
regarded  as  public-utility  corporations  which,  having  no 
shareholders,  make  no  distribution  of  dividends.  But 
the  banks  thus  founded  receive  savings  deposits,  on  which 
they  pay  a  rather  lower  rate  of  interest  than  they  charge 
the  farmers  who  receive  loans.  The  profits  thus  made  are 
used  to  build  up  reserve  funds  which  enable  them  to  carry 
on  their  work. 

The  interest  on  farm  mortgage  loans  is  generally  from 
3J/2  to  4  per  cent.  To  this  must  be  added  the  charge  for 
amortization  and  incidental  expenses.  The  Milan  Savings 
Bank  charges  4.88  per  cent  on  its  farm  mortgage  loans 
which  is  inclusive  of  everything;  whereas  the  charge  made 
by  commercial  banks  for  such  loans  is  5.77  per  cent. 
The  public-utility  savings-banks  of  Italy,  therefore,  are  of 
considerable  benefit  to  farmers  in  the  reduction  of  in- 
terest rates. 

The  sum  of  the  mortgage  bonds  issued  on  farm  loans  is 
guaranteed  by  the  sum  of  the  mortgages  taken,  all  of 
which  must  be  on  first  mortgage.  With  regard  to  the 
degree  of  security,  investment  in  mortgage  bonds  is  equal 
to  that  of  government  bonds  in  Italy,  not  only  in  public 
estimation,  but  legally.     In  fact,  those  societies,  ethical 


130  Principles  of  Rural  Credits 

institutions,  benevolent  associations,  and  all  other  or- 
ganizations which  are  permitted  by  law  to  invest  part 
or  the  whole  of  their  funds  in  securities  issued  or  guaranteed 
by  the  state,  have  the  right  to  invest  from  one-fourth  to 
the  whole  of  their  funds  in  bonds  issued  by  these  mortgage 
credit  institutes. 

As  to  the  prices  of  these  farm  mortgage  bonds,  while 
it  is  not  exactly  true  to  affirm  that  they  are  always  higher 
than  state  bonds,  it  can  be  affirmed  that  mortgage  bonds 
always  maintain  a  high  level,  yet  as  a  rule  they  do  not 
go  above  par.  Account  has  to  be  taken  of  the  variations 
in  the  rates  of  interest  which  range  from  3J/2  to  5  per  cent. 
In  recent  years,  when  there  has  been  a  rising  tendency  in 
all  rates  of  interest,  the  farm  mortgage  bonds  issued  at 
low  rates — that  is,  3^2,  3%,  and  4  per  cent — have  been 
sensibly  depressed.  For  this  reason,  the  institutions  of 
farm  mortgage  credit,  which  have  the  right  to  issue  bonds 
of  various  types,  are  rapidly  suspending  the  issue  of  bonds 
at  low  rates  and  are  issuing  bonds  at  the  higher  rates  of 
interest. 

At  the  beginning  of  1912,  the  total  amount  of  farm  mort- 
gage loans  outstanding  by  these  seven  banks  was  con- 
siderably more  than  $100,000,000. 

The  farm  mortgage  credit  banks  in  Italy  carry  on  their 
work  mainly  for  the  purpose  of  helping  the  landowner 
to  improve  his  lands  and  to  place  him  in  a  position  to  farm 
on  an  economic  basis.  One  of  the  most  striking  purposes 
of  these  institutions  is  to  grant  mortgage  loans  on  farms 
so  as  to  enable  the  direct  heirs  to  an  estate,  all  of  whom 
have  an  equal  claim  on  the  land  under  the  Code  Napoleon, 
to  settle  their  claims  on  a  money  basis.    In  this  manner 


Long-time  Credit  131 

the  farm  is  kept  undivided,  one  of  the  heirs  assuming 
the  mortgage  and  operating  the  farm.  To  promote  the 
settlement  of  farm-land  claims,  such  institutions  loan 
money  on  first  mortgage  at  4  per  cent. 

Some  of  the  savings-banks  have  introduced  a  novel 
feature  of  great  benefit  to  farmers.  This  is  by  granting 
loans  on  mortgage  security  in  the  form  of  open  accounts. 
The  borrower  under  this  system  is  given  a  check  book, 
and  he  may  or  may  not  withdraw  all  the  money  he  is 
entitled  to  by  his  mortgage.  The  borrower  can  at  any 
time  return  to  the  bank  any  part  of  the  loan  which  he 
does  not  use,  paying  interest  only  on  the  money  actually 
withdrawn.  This  is  of  great  benefit  to  the  farmer  in  that 
it  frequently  allows  him  the  use  of  ready  money  which  he 
might  otherwise  have  to  borrow  on  personal  credit.  One 
object  of  the  savings-banks  is  to  promote  agriculture,  and 
for  this  reason  special  advantages  are  offered  to  farmers 
who  can  show  that  the  money  is  required  for  farm- 
improvement  purposes.  One  advantage  is  that  the  money 
is  loaned  at  a  lower  rate  of  interest. 

These  different  features  of  the  Italian  system  of  farm 
mortgage  credit  have  been  the  means  of  improving  agri- 
cultural conditions  in  all  parts  of  the  kingdom. 

Belgium 

The  agricultural  mortgage  banks  of  Belgium  promote 
farm  mortgage  credit  somewhat  differently  from  any 
other  kind  of  mortgage  bank. 

Most  farm  lands  in  Belgium  are  mortgaged  on  the  sys- 
tem of  being  redeemed  in  a  certain  number  of  years.  The 
agricultural  mortgage  banks  were  created  to  facilitate 


132  Principles  of  Rural  Credits 

the  paying  off  of  mortgages  and  to  supply  farmers  with 
money  to  buy  land.  But  this  type  of  bank  does  not  lend 
its  own  funds,  but  it  guarantees  for  a  small  commission 
the  loan  of  an  individual  borrower  to  the  General  Savings- 
Bank  which  advances  the  money.  The  agricultural  mort- 
gage bank  gives  to  the  savings-bank  the  security  furnished 
by  the  borrower  as  well  as  its  own  guaranty.  The  borrower 
pays  43^  per  cent  on  a  mortgage  running  commonly  for 
30  years  on  the  amortization  plan.  The  borrower  can  pay 
in  full  at  any  time  without  notice  and  without  having  to 
pay  any  commission. 

Bonds  are  issued  on  a  mortgage  to  the  same  amount, 
commonly  in  denominations  of  $20.  These  bonds  bear 
interest  at  3.6  per  cent.  They  are  not  listed  on  the  ex- 
change, but  they  sell  readily  at  about  par.  These  bonds 
are  generally  purchased  by  agricultural  organizations. 
The  farmer  pays  4^2  per  cent,  the  bonds  sell  for  3.6  per 
cent,  and  the  General  Savings-Bank  keeps  the  difference 
as  its  profit.  The  farmer  can  get  the  money  on  his  mort- 
gage as  soon  as  it  is  drawn  up,  because  the  bank  has 
bonds  on  hand  and  is  selling  them  all  the  time. 

There  are  fifteen  agricultural  mortgage  banks  in  Bel- 
gium which  thus  carry  on  business  in  farm  mortgages 
through  the  General  Savings-Bank.  In  1910,  these  mort- 
gage banks  made  loans  amounting  to  $580,000  and  had 
outstanding  mortgage  loans  amounting  to  $2,600,000. 
The  General  or  Federal  Savings-Bank  is  strictly  a  state 
institution,  corresponding  to  the  postal  savings-bank  of 
some  countries.  In  Belgium  it  has  no  share  capital.  The 
officials  are  paid  out  of  the  profits  made  on  deposits,  the 
excess  profits  being  divided  among  the  depositors. 


Long-time  Credit  133 

Holland 

The  system  of  mortgages  as  practiced  in  Holland  has 
some  serious  defects,  especially  as  it  applies  to  small  rural 
properties.  For  farm  mortgages  the  system  is  expensive; 
where  mortgages  are  held  by  individuals  rather  than  by 
banks,  there  is  no  guaranty  against  premature  foreclosure; 
and,  lastly,  it  is  exceedingly  difficult  to  pay  off  a  mortgage 
before  maturity. 

To  meet  this  difficulty,  especially  among  farmers  who  be- 
longed to  cooperative  societies,  an  institution  was  founded 
at  Eindhoven  in  1908  for  handling  farm  mortgages.  The 
administration  of  the  Cooperative  Central  Bank  of  Eind- 
hoven, an  outgrowth  of  the  Peasants'  Christian  League 
which  admits  only  farmers  to  membership,  had  reported 
that  a  large  part  of  the  savings  deposits  was  invested  by 
local  branches  in  long-term  mortgages.  This  had  been 
done  because  the  members  had  been  desirous  of  securing 
long-term  mortgage  credit  cheaply.  The  Raiffeisen  rural 
credit  banks,  however,  had  found  it  very  inconvenient 
to  have  their  funds  tied  up  in  long-term  mortgages,  and 
the  administration  of  the  central  bank  had  decided  to 
establish  a  rural  mortgage  bank  to  take  this  business  off 
the  central's  hands. 

Notwithstanding  its  cooperative  origin,  the  mortgage 
bank  of  Eindhoven  was  incorporated  as  a  stock  company 
and  its  articles  of  incorporation  were  approved  by  royal 
decree  on  October  7,  1908.  The  capital  was  $400,000,  of 
which  $80,000  were  subscribed  by  the  cooperative  central 
bank  and  the  local  savings-banks.  The  management  of 
the  new  bank   has   been   temporarily  intrusted  to  the 


134  Principles  of  Rural  Credits 

Central  Savings-Bank  until  the  two  institutions  can  be 
separated. 

The  members  of  the  Central  Cooperative  Bank  of  Eind- 
hoven and  its  branches  may  borrow  money  on  mortgage 
of  this  rural  mortgage  bank.  Loans  are  not  granted  for 
more  than  50  per  cent  of  the  assessed  valuation  of  farms, 
except  in  cases  in  which  the  local  savings-bank  is  willing 
to  indorse  the  mortgage,  in  which  case  the  amount  can  be 
raised  to  66  per  cent.  The  term  of  the  mortgage  credit 
is  forty  years  or  longer,  if  necessary.  The  mortgagor  is 
obliged  to  pay  in  at  least  1  per  cent  of  the  principal 
annually,  but  he  also  has  the  privilege  of  paying  off  any 
part  or  all  of  the  mortgage  at  any  time.  The  rate  of 
interest  is  \x/\  per  cent  which  includes  one-fourth  per  cent 
for  administration  expenses.  No  commissions  and  only 
the  most  necessary  expenses,  such  as  taxes  and  postage, 
are  incurred. 

The  dividends  paid  on  stock  were  l}/£  per  cent  the  first 
year  and  23^  per  cent  in  1910.  In  order  to  promote  the 
advantages  of  this  form  of  agricultural  mortgage  credit 
among  farmers  in  Holland,  inquiries  have  been  made  as  to 
what  extent  the  Postal  Savings-Bank  and  the  State 
Insurance  Bank  could  assist  in  this  work  by  placing  some 
of  their  reserves  on  notes  of  the  rural  mortgage  bank. 
In  the  case  of  the  Postal  Savings-Bank,  it  is  believed  that 
it  will  lend  money  to  the  rural  mortgage  bank  for  long 
terms  at  reasonable  rates  of  interest. 

The  extension  of  this  system  of  rural  mortgage  credit  is 
being  planned  for  the  benefit  of  small  farmers  in  Holland. 
A  commission  appointed  to  look  into  this  matter  has 
reported   that    this    system    of    agricultural   credit   will 


Long-time  Credit  135 

greatly   improve   the    economic   condition   of  the   rural 
population. 

France 

The  Credit  Foncier,  or  Mortgage  Credit  Bank,  of 
France,  grants  mortgage  loans  to  farmers  and  on  rural 
properties,  though  about  three-fourths  of  its  mortgage 
loans  are  made  on  the  security  of  mortgages  on  houses  and 
town  property. 

This  great  financial  institution  has  existed  since  1852. 
It  is  subject  to  the  legislative  provisions  of  the  French 
government  which  appoints  its  governor  and  the  two  vice- 
governors. 

The  mortgage  loans  on  farms  which  the  Credit  Foncier 
grants  are  made  in  three  forms:  First,  a  short-term  loan 
on  mortgage  not  to  exceed  a  period  of  nine  years.  These 
loans  are  not  repayable  by  amortization  and  cannot  be 
repaid  until  the  expiration  of  the  term.  Second,  long- 
term  loans  which  run  from  ten  to  seventy  years.  These 
are  repayable  by  amortization  and  can  be  repaid  in  full 
at  the  pleasure  of  the  borrower  before  the  expiration  of 
the  term  for  which  they  are  made.  Third,  current  account 
on  mortgage  guaranty,  or  the  opening  of  what  is  called  a 
mortgage  line  of  credit. 

Under  the  last-named  system  the  borrower  is  given  a 
line  of  credit  which  he  may  use  in  the  same  manner  as  any 
ordinary  banking  account.  Such  an  account  is  only 
granted  for  a  maximum  period  of  nine  years. 

The  rate  of  interest  on  farm  mortgage  loans  in  1913 
was  4.65  per  cent,  while  the  rate  on  current  account  with 
mortgage  guaranty  was  about  4.95  per  cent.    The  security 


136  Principles  of  Rural  Credits 

for  the  loan  is  a  mortgage  on  the  property  itself,  which, 
on  arable  land,  is  not  more  than  one-half  the  appraised 
value.  In  the  case  of  loans  on  vineyards  and  forest  lands, 
which  are  regarded  as  great  risks,  the  loan  cannot  ex- 
ceed one-third  the  appraised  value  of  the  property.  The 
mortgage  loans  on  the  amortization  plan  are  repayable 
in  semi-annual  installments. 

The  share  capital  of  this  joint-stock  bank  was  originally 
fixed  at  $5,000,000,  divided  into  50,000  shares  at  $100  each. 
For  the  carrying  on  of  mortgage  loans,  the  bank  obtains 
the  capital  which  it  requires  by  the  issue  of  bonds.  The 
law  prohibits  the  issue  of  bonds  in  excess  of  the  value  of 
the  mortgages  taken  as  security.  The  farmer,  however, 
in  taking  out  a  loan  is  not  paid  in  bonds  but  in  cash. 

In  the  case  of  current-account  mortgage  loans,  every 
six  months  the  account  is  checked  up  and  interest  is 
charged  only  on  the  amount  of  money  actually  used. 

The  Credit  Foncier  has  been  of  great  assistance  to  agri- 
culture. Before  the  bank  was  established,  a  farmer  or 
landowner  who  wanted  to  borrow  money  to  improve  his 
land  or  carry  on  any  productive  enterprise  had  to  resort 
either  to  the  small  bank,  which  charged  high  rates  of 
interest,  or  to  a  notary  and  get  out  a  mortgage  bond  which 
was  also  a  very  expensive  method.  Under  this  system 
he  borrowed  the  money  at  5  per  cent  interest,  but  the 
costs  were  very  high;  and,  until  the  Credit  Foncier  was 
founded,  he  could  not  repay  the  loan  on  the  amortization 
plan.  Now,  however,  a  farmer,  who  desires  to  borrow 
$10,000  for  farm  improvement  on  mortgage,  may  go  to 
the  Credit  Foncier  and  secure  the  money  on  a  mortgage 
loan  say  for  thirty  years.    By  paying  4^  per  cent  interest 


Long-time  Credit  137 

and  V/i  per  cent  amortization,  the  farmer  will  have  re- 
paid the  whole  debt  of  $10,000  at  the  end  of  thirty  years. 
Under  the  old  straight  mortgage  system,  farmers  have 
paid  5  per  cent  interest  all  their  lives  and  at  their  death 
the  only  way  to  satisfy  the  mortgage  has  been  to  sell  the 
farm  over  the  heads  of  their  families.  This  distress  has 
been  relieved  by  the  Credit  Foncier. 

LOANS    BY   MISCELLANEOUS   BANKS 

Many  other  kinds  of  institutions,  which  primarily 
carry  on  a  general  commercial  banking  business  in  certain 
European  countries,  also  grant  mortgage  loans  for  farm- 
ing operations,  for  land  improvement,  and  for  various 
other  objects  directly  related  to  agriculture.    For  example: 

There  are  the  land-improvement  annuity  banks  of 
Germany,  particularly  in  the  Prussian  provinces,  which 
were  founded  for  providing  mortgage  credit  for  land 
improvement  that  should  be  adequate  in  amount,  not 
subject  to  recall,  based  on  the  amortization  plan,  and 
bearing  moderate  interest. 

There  are,  also,  the  private  land-mortgage  banks  of 
Russia,  established  on  the  amortization  system  of  making 
payments  on  mortgage  loans.  The  farm  mortgages  issued 
by  these  banks  run  for  periods  ranging  from  ten  to  sixty- 
six  years  at  4  per  cent  interest. 

In  like  manner,  the  twenty-three  canton  banks  in 
Switzerland,  which  are  state-controlled  institutions,  make 
mortgage  loans  on  farm  properties.  Some  of  these  banks 
make  mortgage  loans  on  the  amortization  plan,  while 
others  make  straight  mortgage  loans  only.  The  annual 
payments  required  by  these  banks  for  interest,  amortiza- 


138  Principles  of  Rural  Credits 

tion,  and  cost  of  administration  range  from  4}^  to  5J/£ 
per  cent. 

The  Land-Mortgage  Bank  of  Spain  has  authority  to 
supply  farm  mortgage  credit  at  an  interest  rate  not  to  ex- 
ceed 6  per  cent,  and  this  bank  has  the  exclusive  privilege 
of  issuing  land-mortgage  bonds.  This  bank  made  mort- 
gage loans  in  1911  to  the  value  of  $2,212,825,  of  which 
amount  nearly  one-half,  or  $1,085,517,  was  granted  on 
farm  mortgages.  There  are  also  private  land-mortgage 
banks  which  make  loans  to  farmers  in  Spain.  But  neither 
the  public  nor  private  land-mortgage  banks  afford  much 
service  to  small  farmers,  although  they  have  been  of  con- 
siderable benefit  to  large  proprietors.  Two  private  land- 
mortgage  banks  have  the  right  to  make  mortgage  loans 
to  local  credit  societies  in  Spain. 


CHAPTER  VIII 

CHARACTERISTICS  OF  EUROPEAN  MORTGAGE 

CREDIT 

From  the  foregoing  summary  of  the  organization  of 
cooperative  and  non-cooperative  farm  mortgage  credit, 
it  is  evident  that  all  classes  of  farmers  in  Europe  are  amply 
provided  with  credit  facilities  of  this  nature.  Many  of 
these  agencies  are  mainly  of  a  public  or  non-profit  seeking 
character.  They  grant  loans  up  to  one-half  or  two-thirds 
of  the  property  valuation  on  first  mortgage  at  moderate 
and  unchangeable  rates  of  interest,  not  subject  to  recall, 
and  repayable  by  small  annual  installments  to  sinking 
funds.  In  addition,  mortgagors  have  the  privilege  of 
paying  off  the  whole  or  a  part  of  the  mortgage  indebted- 
ness at  any  time  or  by  giving  short  notice. 

The  joint-stock  mortgage  banks  and  some  of  the  sav- 
ings-banks form  an  exception  as  regards  the  making  of 
profits.  Some  of  the  savings-banks,  although  in  theory 
they  do  not  make  mortgage  loans  on  the  amortization 
plan,  do  as  a  matter  of  fact  lend  considerable  sums  against 
reducible  mortgages,  and,  as  regards  the  balance,  are 
seldom  forced  to  exercise  their  right  of  recall.  Farmers 
borrowing  of  these  institutions  seldom  have  to  worry  when 
the  time  approaches  for  the  mortgage  to  become  due. 
Renewals  are  usually  made  by  the  same  or  another  bank 
without  much  trouble  or  expense.  Although  not  aiming 
to  make  profits,  these  banks  often  realize  surpluses  which 

139 


140  Principles  of  Rural  Credits 

the  state,  provincial  or  savings-banks  are  able  to  con- 
tribute to  their  guaranteeing  authority  for  public  purposes. 
In  like  manner,  the  Landschaften,  or  cooperative  farm 
mortgage  associations,  are  able  to  apply  substantial  sums 
toward  relieving  the  indebtedness  of  their  members  as  a  re- 
sult of  profits  made  by  their  local  banks  and  in  other  ways. 

The  organization  of  European  mortgage  credit  pre- 
sents a  further  important  feature  of  being  decentralized. 
The  different  kinds  of  banks  provide  nearly  every  district 
with  a  public  mortgage  credit  bank  which  brings  its 
services  within  the  convenient  reach  of  nearly  all  farmers 
within  their  field  of  operations  by  their  system  of  local 
representatives. 

Except  in  the  case  of  savings-banks,  capital  is  mainly 
obtained  by  the  issue  and  sale  of  farm  mortgage  bonds. 
The  responsibility  for  the  payment  of  these  bonds  lies 
with  the  institution  which  issues  them.  The  Landschaften, 
or  cooperative  farm  mortgage  associations,  alone  appear 
to  leave  to  borrowers  the  realization  of  the  money  on  these 
bonds,  but  in  recent  years  this  has  been  facilitated  through 
their  own  loan  banks.  The  other  kinds  of  institutions 
pay  cash  to  the  borrower  at  a  rate  slightly  below  the  cur- 
rent market  price,  selling  the  bonds  on  their  own  account 
either  at  the  time  or  at  a  future  date.  The  borrower 
usually  has  to  pay  from  Y/±  to  Yi  of  1  per  cent  commission 
for  this  service. 

Loans  by  the  issue  of  bonds  are  advantageous  in  not 
being  subject  to  recall  or  to  an  increase  in  the  rate  of  in- 
terest on  the  part  of  the  lender,  while  they  allow  the 
borrower  to  repay  his  debt  by  the  purchase  and  presenta- 
tion of  bonds  of  the  same  class  issued  by  the  institution 


Characteristics  of  European  Mortgage  Credit    141 

when  said  bonds  are  low  in  price.  Their  principal  dis- 
advantage consists  in  their  possible  depreciation  in  value 
at  the  time  of  granting  the  loan,  while  the  borrower  has 
to  pay  interest  on  the  full  amount  of  the  loan.  As  a  rule, 
however,  the  depreciation  in  the  value  of  farm  mortgage 
bonds  is  merely  nominal. 

The  organization  of  mortgage  credit  in  many  countries 
of  Europe  has  been  greatly  facilitated  by  the  complete 
system  of  registration  of  title.  In  the  German  Empire, 
for  example,  a  uniform  system  was  established  in  1900 
which  provides  for  obligatory  registration  of  title,  priority 
of  each  claim  in  the  order  of  its  registration,  and  freedom 
of  inspection  of  the  registers.  These  registers  are  drawn 
up  for  small  areas  and  are  maintained  by  them;  they  de- 
scribe each  estate  and  recite  all  personal  and  other  charges 
against  it;  and,  in  general,  no  claims  against  an  estate 
which  are  not  duly  registered  are  valid  in  a  court  of  law. 
It  may  be  added  that  the  costs  of  registration  or  cancella- 
tion of  mortgages  are  very  moderate.  In  Prussia,  the 
registration  of  a  mortgage  for  $2,500  costs  $10,  for  can- 
cellation $5,  and  this  sum  in  each  case  includes  the  notarial 
and  court  fees. 

Compulsory  registration  of  title  as  it  exists  in  Germany, 
Austria-Hungary,  and  Russia,  or  compulsory  registration 
of  deeds  as  it  exists  in  France,  Belgium,  Holland,  and 
other  countries,  appears  to  be  a  necessary  condition  for 
the  foundation  of  a  system  under  which  landowners  may 
obtain  mortgage  credit  on  suitable  terms  by  the  issue  of 
farm-land  bonds  which  would  take  the  place  of  mortgages 
as  first-class  securities  in  the  open  money  market  in  the 
different  countries  of  the  civilized  world. 


PRINCIPLES  OF  RURAL  CREDITS 

PART  II 

A    CONSTRUCTIVE    CREDIT    SYSTEM    FOR 
AMERICAN    FARMERS 


CHAPTER  IX 
THE  RURAL  CREDIT  PROBLEM 

In  modern  business,  credit  is  displacing  to  a  great 
extent  cash  transactions.  But  credit  implies  a  debt, 
the  payment  of  which  is  put  off  to  a  more  convenient 
season.  The  business  man  receives  goods  on  credit,  sells 
them  at  a  profit,  pays  his  debt  sometimes  with  interest, 
and  orders  a  new  supply  of  goods.  A  large  part  of  the 
world's  business  is  done  in  this  way,  money  being  little 
used  directly  in  many  transactions. 

A  man's  business  is  thus  enlarged  to  the  extent  of  his 
credit.  Suppose  a  merchant  has  five  thousand  dollars  in 
cash  with  which  he  would  enter  into  business  in  a  small 
way.  He  buys  his  stock  of  goods  but  finds  the  supply 
inadequate.  Suppose  the  firm  which  sold  him  the  goods 
now  gives  him  credit  for  an  equal  amount  of  goods  to  be 
paid  for  in  six  months,  a  year,  or  two  years  as  policy  may 
dictate.  The  merchant  thus  doubles  his  supply  of  goods 
by  means  of  credit,  and  his  prospects  of  profit  are  doubled, 
by  doubling  the  prospective  amount  of  his  business,  with- 
out the  expenditure  of  any  more  money  on  his  part. 

If  his  judgment  has  been  sound  and  his  business  success- 
ful, when  the  time  comes  around  he  pays  his  bill  and  re- 
news his  credit  even  to  a  greater  extent,  perhaps,  than 
before.  Both  he  and  the  business  firm  have  profited  by 
the  extension  of  credit;  the  latter  has  sold  more  goods 

145 


146  Principles  of  Rural  Credits 

to  the  merchant,  thereby  making  an  increased  profit, 
and  the  former  has  enlarged  his  business  and  doubled  hia 
financial  income.  Sound  credit,  therefore,  promotes  busi- 
ness prosperity. 

THE   NATURE   OF   AGRICTJLTURE 

Credit  granted  for  the  promotion  of  any  line  of  agri- 
culture is  known  as  rural  credit.  Its  aims  are  precisely 
the  same  as  business  credit.  By  enlarging  his  credit, 
the  farmer  may  expect  to  increase  his  business  and  pro- 
mote his  financial  welfare.  Under  ordinary  circumstances, 
these  results  should  be  realized.  By  credit  the  farmer  can 
increase  his  work  and  his  efficiency;  he  can  procure  better 
stock  and  better  implements.  For  the  development  of 
agriculture,  therefore,  the  value  of  credit  must  be  recog- 
nized as  it  is  in  other  kinds  of  business. 

But  agriculture  is  a  unique  industry.  It  produces  the 
raw  materials  for  food,  clothing,  and  articles  of  domestic 
use.    These  are  three  of  the  most  essential  needs  of  life. 

Food  is  man's  first  need,  and  the  farm  feeds  the  world. 
The  daily  bread  of  the  race  comes  from  the  soil  and  the 
farmer  is  the  world's  agent  of  production. 

But  next  to  food  is  clothing,  and  the  raw  materials  of 
the  textile  industries  come  from  the  soil  also.  And  as 
part  of  the  products  of  the  textile  industries  may  be 
added  many  of  the  articles  which  furnish  the  home — 
the  center  of  social  life — where  they  serve  as  our  luxuries, 
our  comforts,  and  our  needs.  The  raw  materials  of  these 
manufactured  household  goods  are  also  produced  from  the 
fields  by  the  labor  of  the  farmer,  and  they  add  much  to 
our  well-being  as  measured  by  our  high  standards  of  life. 


The  Rural  Credit  Problem  147 

Agriculture  is  the  universal  industry.  The  existence, 
progress  and  much  of  the  industry  of  the  race  absolutely 
depend  upon  it.  What  promotes  agriculture  benefits 
mankind;  the  progress  of  agriculture  and  the  progress  of 
civilization  go  hand  in  hand.  Our  industries  are  closely 
related  and  dependent  one  upon  another,  and  the  raw 
materials  for  many  of  them  are  provided  by  agriculture. 
To  promote  rural  credit  for  the  development  of  agricultural 
enterprises  and  to  increase  the  efficiency  of  the  farmer  is 
to  lay  the  foundation  of  a  greater  national  prosperity. 
This  the  progressive  nations  of  the  world  are  slowly  be- 
ginning to  recognize.  Let  us  pass  on,  therefore,  to  con- 
sider some  other  characteristic  features  of  agriculture 
which  help  to  complicate  the  rural  credit  problem  as  it 
now  appears  in  the  United  States. 

The  business  of  farming  is  the  most  precarious  of  all 
industries.  The  farmer  may  plow  and  harrow  his  fields 
and  sow  his  seed,  but  he  will  have  no  assurance  that  he 
will  reap  a  harvest.  Being  subject  to  late  frost  in  spring 
or  early  frost  in  fall,  his  fruit  and  other  tender  crops  may 
be  ruined  in  the  bud  or  before  fully  mature;  being  subject 
to  excessive  rain  or  drought  during  the  growing  season, 
he  may  reap  only  half  a  normal  yield;  being  subject  to 
wind  and  hail  storms,  his  crops  may  be  damaged  enor- 
mously or  wholly  ruined.  Surely  the  farmer  that  ploweth 
plows  only  in  hope  of  securing  a  harvest,  and  his  hope 
may  not  be  realized.  The  business  of  general  farming  is 
risky  at  the  best. 

Likewise  with  the  stockman  who  raises  meat  and  draft 
animals.  Pestilence  and  famine  may  diminish  his  flocks 
and  herds  to  his  financial  embarrassment.     A  sudden 


148  Principles  of  Rural  Credits 

blizzard  sweeping  over  the  western  plains  or  foothills 
may  destroy  hundreds  or  even  thousands  of  his  grazing 
cattle;  exposure  to  stormy  weather  or  to  the  harassing 
pest  of  stray  dogs  may  ruin  his  flock  of  sheep  at  maternity 
time;  an  unexpected  attack  of  hog  cholera  may  wipe  out 
his  whole  drove  of  promising  pigs — all  the  forces  of  nature 
are  pitted  against  the  stockman  which  render  his  industry 
at  all  times  more  or  less  insecure. 

The  control  of  these  natural  forces  is  not  within  the 
farmer's  hands.  Before  them  he  frequently  stands  help- 
less and,  when  they  have  passed,  he  often  finds  himself 
penniless.  A  promising  crop  or  a  flourishing  flock  may 
sometimes  become  a  total  loss.  The  farmer's  individual 
loss,  multiplied  by  thousands  all  over  the  country,  becomes 
more  or  less  of  a  national  calamity.  According  to  United 
States  Department  of  Agriculture  Farmers'  Bulletin  590, 
the  losses  of  meat  animals,  horses  and  mules  in  1913 
from  disease  and  exposure  are  enormous.    It  says: 

"On  the  basis  of  farm  values  January  1,  the  losses  from 
disease  of  cattle,  hogs,  and  sheep  aggregated  in  value 
about  $122,000,000,  and  losses  from  exposure  of  cattle 
and  sheep  about  $28,000,000— a  total  loss  in  meat  animals 
from  disease  and  exposure  in  one  year  of  about  $150,000,000 
— an  amount  which  would  have  been  more  than  sufficient 
to  furnish  a  normal  year's  supply  of  meat  to  the  entire 
population  of  the  New  England  States." 

In  addition  to  meat  animals,  "if  the  estimated  loss  of 
20.6  per  thousand  be  applied  to  the  numbers  and  value 
of  horses  and  mules  on  farms  January  1,  it  would  indicate 
a  total  loss  of  approximately  523,000  head,  at  $113  per 
head,  or  a  total  of  $59,100,000." 


The  Rural  Credit  Problem  149 

The  total  value  of  the  losses  of  live  stock  in  1913 
amounted  to  about  $210,000,000.  The  losses  from  all 
other  causes  affecting  general  agriculture  would  make 
the  total  losses  something  enormous.  The  farming  in- 
dustry as  a  whole  is  thus  shown  to  be  an  exceedingly  pre- 
carious business,  and  its  failure,  as  well  as  its  success, 
must  have  its  effect  to  a  greater  or  less  extent  upon  our 
national  welfare. 

Another  feature  which  makes  farming  precarious  is 
that  many  products  are  extremely  perishable.  These 
products  must  be  sold  quickly  or  they  will  deteriorate  in 
value  and  in  a  short  time  become  wholly  worthless. 
Among  the  products  more  or  less  easily  perishable  may 
be  mentioned  milk,  cream,  butter,  eggs,  dressed  poultry, 
small  fruits,  and  many  truck  crops.  And  these  largely 
enter  into  the  daily  needs  of  mankind.  Not  only  is  the 
farmer  handicapped  by  the  forces  of  nature  in  producing 
a  crop,  but  the  nature  of  his  business  frequently  compels 
him  to  dispose  of  his  goods  at  a  low  price  in  order  to  get 
reasonable  returns  for  his  labor  and  capital.  The  neces- 
sary risks  taken  in  handling  these  products  through  the 
ordinary  channels  of  commission  men  and  retail  dealers, 
who  know  well  enough  the  difficulties  of  the  situation, 
force  them  to  pay  the  lowest  possible  price  even  for  goods 
that  are  in  first-class  condition.  The  burden  of  handling 
perishable  goods  is  not  assumed  by  the  middlemen,  but 
it  is  thrust  back  on  the  farmer  who,  when  marketing  alone 
as  an  individual  producer,  has  to  receive  compensation 
on  the  basis  of  prospective  losses  as  a  result  of  the  perish- 
able nature  of  his  goods. 

Another  characteristic  of  farming  is  that  it  is  not  a  con- 


150  Principles  of  Rural  Credits 

centrated  industry.  Farming  requires  extensive  fields 
to  produce  raw  materials.  The  cotton  grown  in  a  whole 
county  could  easily  be  manufactured  in  a  single  building. 
The  workmen  engaged  in  cotton-cloth  manufacture  may 
meet  each  other  daily  and  are  always  on  hand  for  united 
effort.  Not  so  with  farmers.  The  nearest  neighbor  may 
be  a  mile  away;  the  farmer  engaged  in  growing  the  same 
kinds  of  crops  may  be  five  miles  or  more  away.  The  op- 
portunity for  united  effort  among  farmers  varies  with  the 
size  of  the  farms  and  the  kind  of  products  raised.  A  com- 
munity of  small  truck-growers  or  adjacent  growers  of 
citrus  fruits  is  a  more  intensive  field  for  united  effort 
than  a  community  of  general  farmers  no  two  of  whom  may 
grow  the  same  crops  and  who  operate  farms  probably  not 
less  than  160  acres  in  extent.  But  in  no  sense  can  farm- 
ing be  considered  as  a  concentrated  industry,  not  even  in 
Europe  where  the  average  farm  is  so  much  smaller  than  it 
is  in  this  country  and  where  the  rural  population  is  much 
more  densely  settled. 

GROWTH   IN   FARM   TENANCY 

As  a  last  feature  having  a  bearing  on  the  rural  credit 
problem  is  the  fact  that  so  many  farmers  do  not  own  the 
land  they  cultivate.  The  interest  of  tenant  farmers  in 
the  land  they  work  is  of  a  transitory  nature.  A  tenant 
farmer  may  be  on  one  farm  this  year  and  on  an  entirely 
different  farm  a  year  hence.  Tenant  farmers,  under  the 
systems  of  leasing  prevailing  in  many  parts  of  the  country, 
pave  the  way  for  soil  exploitation  as  they  in  turn  are  often 
exploited  by  the  merchants  who  furnish  the  means  of 
running  the  farm  until  the  crops  are  harvested. 


The  Rural  Credit  Problem  151 

Farm  tenancy  in  itself  is  by  no  means  a  small  problem. 
The  increase  of  tenant  farmers  during  the  last  census 
decade  is  greater  than  the  increase  of  farm  owners.  The 
Census  of  1910  shows: 

1900  1910  Increase 

Farm  owners 3,653,323        3,948,722        295,399 

Farm  tenants 2,024,964        2,354,676        329,712 

A  study  of  the  Census  statistics  shows  that  between 
1900  and  1910  the  farms  operated  by  owners  increased 
8.1  per  cent  in  number,  while  those  operated  by  tenants 
increased  16.3  per  cent.  Since  1880,  and  probably  further 
back,  farms  operated  by  tenants  increased  in  each  decade 
faster  than  those  operated  by  owners.  Tenant  farms  con- 
stituted 25.6  per  cent  of  all  farms  in  1880;  28.4  per  cent 
in  1890;  35.3  per  cent  in  1900;  and  37  per  cent  in  1910. 

While  the  increase  in  farm  tenancy  is  not  startling,  it  is 
at  least  sufficient  to  attract  attention  to  itself  as  an  eco- 
nomic problem  of  no  small  magnitude.  But  farm  tenancy 
becomes  serious  when  viewed  from  the  standpoint  of 
credit.  Are  these  2,354,676  farm  tenants  to  be  utterly 
ignored  in  any  rural  credit  scheme  that  may  be  devised 
and  applied  in  the  United  States?  Are  they  to  be  properly 
financed  in  the  future  or  to  be  badly  financed  as  hereto- 
fore and  thus  continue  to  be  the  victims  of  unscrupulous 
exploitation?  It  will  be  disastrous  on  our  national  wel- 
fare to  discourage  this  great  host  of  wealth  producers  in 
an  industry  already  taxed  to  the  utmost  to  supply  our 
economic  needs;  but  it  may  add  much  to  the  future  pros- 
perity of  this  nation  if  encouragement  for  tenant  farmers 
is  provided  by  a  just  and  rational  credit  system. 


152  Principles  of  Rural  Credits 

IMPORTANCE    OF   CREDIT   FACILITIES 

The  preceding  outline  on  the  nature  of  agriculture  as 
an  industry  is  the  first  aspect  of  the  rural  credit  problem 
in  the  United  States.  But  there  are  other  phases  of  the 
question  which  tend  to  complicate  the  problem.  The 
great  expanse  of  our  country  with  its  various  climatic 
conditions  which  compel  the  culture  of  different  crops 
and  the  practice  of  different  agricultural  methods;  the 
right  of  the  various  states  to  promulgate  their  own  laws 
as  to  interest  rates  and  commissions  on  loans;  the  lack 
of  organization  among  the  farmers  in  many  states  and 
throughout  the  nation, — these  conditions  make  it  hard 
to  formulate  a  system  of  rural  credit  that  could  be  adapted 
to  all  parts  of  the  country  and  to  all  classes  of  farmers 
alike. 

Of  the  91,972,266  persons  in  the  United  States  on 
April  15,  1910,  no  less  than  49,348,883  belong  to  the 
rural  population,  or  nearly  54  per  cent.  The  land  area 
of  the  country  amounts  to  1,903,289,600  acres,  of  which 
878,798,325  acres  are  included  in  farm  lands.  The  number 
of  all  farms  was  6,361,502,  or  an  average  size  of  138  acres 
to  the  farm.  The  total  value  of  all  farm  property  was 
$40,991,449,090,  or  an  average  value  of  86,444  to  a  farm. 

From  a  consideration  of  these  figures  alone,  the  impor- 
tance of  credit  facilities  for  such  a  vast  population  engaged 
in  an  industry  which  presents  so  great  a  property  valua- 
tion can  hardly  be  questioned.  But  the  rural  population, 
on  account  of  their  lack  of  organization,  is  peculiarly 
subject  to  credit  exploitation.  While  states  regulate 
the  legal  rates  of  interest  that  can  be  charged  for  loans, 


The  Rural  Credit  Problem  153 

still  the  legal  rates  are  frequently  doubled  when  loans  are 
made  to  farmers  by  various  means,  particularly  by  the 
so-called  "commissions"  and  "renewal  charges."  Mort- 
gage loans  are  usually  made  for  short  periods,  say  from 
three  to  five  years,  and  when  commissions  and  renewal 
charges  are  taken  into  consideration,  the  legal  rate  of  in- 
terest is  greatly  enlarged.  To  place  this  financial  burden 
on  the  shoulders  of  those  engaged  in  an  industry  already 
rendered  precarious  by  the  forces  of  nature  is  to  dis- 
courage that  class  of  wealth  producers  whose  importance 
to  our  national  welfare  is  generally  recognized.  While 
every  legitimate  agency  is  being  set  in  motion  to  encourage 
farm  occupancy  and  to  improve  rural  conditions,  little 
or  no  consideration  has  been  given  by  our  state  legisla- 
tures to  encourage  farmers  and  promote  farming  by  due 
consideration  of  the  credit  problem. 

Mortgage  loan  rates 

Within  two  miles  of  the  place  where  these  lines  are  being 
penned  are  two  families  engaged  in  farming.  The  first 
farmer  took  part  of  an  old  Maryland  plantation  whose 
soil  was  worn  out  and,  by  hard  work  and  intelligent  farm- 
ing, brought  up  the  land  to  a  high  state  of  production. 
But  this  farmer  is  unable  to  borrow  on  his  improved  land 
except  on  a  three-year  mortgage  at  6  per  cent  interest 
and  by  the  payment  of  5  per  cent  commission  in  addition. 
This  would  make  his  interest  nearly  8  per  cent  per  annum 
when  all  other  items  of  expense,  which  must  be  incurred 
every  three  years,  are  taken  into  consideration. 

A  more  glaring  instance  of  exploitation  of  farm  owners 
is  that  of  three  sisters  engaged  in  poultry  raising  and  bee- 


154  Principles  of  Rural  Credits 

keeping.  Being  desirous  of  securing  a  loan  of  $600  to 
enlarge  the  poultry  side  of  their  business,  they  could  get 
the  money  only  on  the  basis  of  10  per  cent  commission  in 
addition  to  the  regular  6  per  cent  interest.  The  amount 
was  advanced  on  two  notes  secured  by  mortgage  for  S300 
each,  one  of  which  was  for  one  year  and  the  other  for  two 
years.  This  method  makes  their  interest  practically  18 
per  cent  per  annum,  or  about  three  times  the  legal  rate 
of  interest. 

These  instances  of  the  exploitation  of  farm  owners 
under  our  present  mortgage  system  are  characteristic 
of  what  is  going  on  all  over  the  United  States.  Investiga- 
tions were  recently  made  by  the  Rural  Organization  Serv- 
ice of  the  United  States  Department  of  Agriculture  to 
ascertain  among  other  things  the  rate  of  interest  on  both 
long-time  and  short-time  loans.  The  former  are  generally 
mortgage  loans  which,  of  course,  apply  to  farm  owners 
only;  while  the  latter  include  both  collateral  and  personal 
loans  which  may  be  made  to  either  farm  owners  or  tenant 
farmers. 

The  returns  from  thirty  states  show  that  the  nominal 
average  interest  rate  on  first  mortgage  farm  loans  is  7 1/15  per 
cent.  To  this  must  be  added  the  charges  for  abstracts, 
commissions,  and  other  incidental  expenses.  Interest 
rates  vary  above  and  below  this  average  in  different 
States.  Thus  the  average  farm  mortgage  interest  rate 
in  Alabama  is  8.8  per  cent;  in  Arkansas  it  is  also  8.8;  in 
Arizona,  10;  Illinois,  5.5;  Indiana,  5.6;  Iowa,  5.6;  Massa- 
chusetts, 5.5;  Minnesota,  6.2;  Montana,  9.3;  Ohio,  5.7; 
Oklahoma,  7.2;  Pennsylvania,  5.3;  Texas,  8.5;  Utah, 
8.7;  Wisconsin,  5.6;  Wyoming,  9.2. 


The  Rural  Credit  Problem  155 

Not  only  do  the  average  rates  of  interest  on  farm  mort- 
gages vary  between  the  states,  but  they  vary  within  the 
state  itself,  some  states  showing  greater  variations  than 
others.  Minnesota  has  the  most  marked  variation  in 
interest  rates  of  all  the  states,  which  runs  from  5  per  cent 
in  the  southern  part  up  to  9  or  10  per  cent  in  the  north 
central  part.  The  causes  of  this  great  variation  in  inter- 
est rates  on  farm  mortgage  loans  may  be  attributed  to 
soil  conditions,  climatic  conditions,  methods  of  farming, 
distance  from  markets,  the  different  financial  agencies 
through  which  loans  are  secured,  and  the  amount  of  loan 
to  the  security.  One  or  more  of  these  factors  may  have 
a  bearing  on  determining  the  rate  of  interest  charged  on 
farm  mortgage  loans  within  a  given  state.  The  under- 
lying principle  which  regulates  the  rate  seems  to  be  that  of 
the  greater  the  natural  and  economic  risk  the  greater 
the  rate  of  interest  must  be  charged.  It  is  the  embodi- 
ment of  the  lender's  aim  to  protect  himself  against  pros- 
pective loss. 

Personal  loan  rates 

For  short-time  loans  on  collateral  or  personal  notes, 
the  general  average  rate  of  interest  for  all  the  states  is 
8.4  per  cent.  In  the  different  states,  the  run  of  the  aver- 
age rates  of  interest  is  very  similar  to  that  of  mortgage 
loans.  The  lowest  is  in  New  York  and  Pennsylvania 
where  the  average  rate  of  interest  is  5.9  per  cent  for  short- 
time  loans.  The  highest  rates  are  in  the  Rocky  Mountain 
section  of  states  and  in  the  South,  ranging  from  10.6  per 
cent  in  Utah  to  12.8  per  cent  in  Arizona.  The  highest 
rate  is  in  Oklahoma  with  13.4  per  cent. 


156  Principles  of  Rural  Credits 

That  the  farmer,  as  to  securing  credit,  does  not  stand 
on  an  equality  with  the  average  business  man  is  shown  not 
only  from  the  high  rates  of  interest  charged,  but  also 
from  the  average  amount  of  the  loans  secured.  Taking 
the  United  States  as  a  whole,  the  average  short-time  loan 
to  farm  tenants  is  $250,  to  farm  owners  $644,  and  to 
business  men  $1,465. 

But  the  man  in  business  is  not  subject  to  such  great 
exploitation  on  short-time  loans  as  is  the  average  farmer. 
Every  effort  is  made  by  money  lenders  to  get  around  the 
law  in  those  states  which  fix  a  maximum  rate  of  interest. 
In  the  case  of  borrowing  money,  the  custom  is  to  make  out 
a  note  for  a  certain  sum  and  then  turn  over  to  the  borrower 
a  less  sum  in  cash— from  $70  to  $90  on  a  note  for  $100 
— the  legal  rate  of  interest  being  charged  for  the  whole 
amount  of  the  note.  In  the  South  instances  have  been 
officially  reported  that  some  banks  charge  negro  farmers 
100  per  cent  interest  for  loans,  the  stipulation  being  made 
that  both  principal  and  interest  shall  be  paid  in  six  months. 
This  would  make  the  rate  of  interest  200  per  cent  per 
annum.  This  is  called  a  "premium"  for  the  use  of  the 
money. 

When  it  comes  to  tenants  or  poor  farm  owners,  who  are 
more  or  less  dependent  upon  merchants  for  credit  in  the 
form  of  cash,  household  goods,  implements,  seed,  fer- 
tilizers, and  the  like,  the  case  is  much  worse.  The  method 
practiced  is  about  as  follows : 

A  young  man  wishes  to  farm  on  his  own  account.  He 
has  secured  the  land,  but  has  no  capital  with  which  to 
stock  his  place  and  run  his  home.  There  are  merchants 
in  the  South  who  make  a  business  of  financing  such  farmers. 


The  Rural  Credit  Problem  157 

A  merchant  will  have  a  talk  with  the  young  man  and,  if  he 
considers  him  honest  and  a  good  risk,  he  will  make  out  a 
blanket  or  a  crop-lien  note,  on  which  stock,  farm  imple- 
ments, household  goods,  prospective  crops,  and  the  like, 
are  all  named  and  described.  After  the  agreement  is 
made,  the  merchant  furnishes  the  farmer  such  imple- 
ments, stock,  seed,  and  so  on,  as  he  needs.  In  the  case  of 
a  tenant,  the  merchant  usually  assumes  his  rent  also. 
For  such  a  young  farmer  the  note  may  range  from  $300 
to  $500,  according  to  the  size  of  the  place  to  be  worked. 
In  the  case  of  a  farmer  who  already  has  a  mule  and  some 
implements,  all  that  will  be  needed  may  be  fertilizers, 
dry  goods,  groceries,  and  perhaps  some  seed.  The  notes 
in  this  case  are  usually  from  $150  to  $300,  according  to 
the  size  of  the  place  and  family. 

All  the  collateral  named  in  the  note  may  be  sold  at 
forced  sale  if  the  crops  fail  or  if  the  merchant  wishes  to 
foreclose  on  the  borrower  for  any  reason.  This  is  often 
done  if,  in  the  opinion  of  the  merchant,  the  borrower  has 
not  worked  as  hard  to  make  a  crop  as  he  should  or  if  the 
merchant  does  not  consider  the  borrower  a  satisfactory 
risk  after  trying  him  for  a  year.  All  of  which  works 
hardship  on  the  poor  farmer. 

In  charging  the  borrower  for  goods  bought,  various 
methods  of  exploitation  are  practiced.  The  merchant 
first  makes  out  a  blanket  or  crop-lien  note,  perhaps  about 
February  1,  to  run  until  September  1  or  October  1  accord- 
ing to  crop  being  raised,  with  a  "premium"  charge  of  20 
per  cent  frequently,  if  the  farmer  is  illiterate.  Such  a  note 
made  for  $300  is  good  for  the  purchase  of  $240  worth  of 
goods  only.    Then  he  charges  interest  varying  from  8  to 


158  Principles  of  Rural  Credits 

20  per  cent  on  a  $300  note  as  though  it  ran  for  a  year, 
though  it  may  only  run  for  six  or  eight  months.  Then 
he  sells  goods  at  25  to  40  per  cent,  which  is  the  usual  gross 
profits  to  a  cash  trade,  with  a  "premium"  added  at  almost 
any  per  cent  his  conscience  will  permit.  All  of  this  amounts 
practically  to  downright  robbery. 

GENERAL   INTEREST  IN   RURAL   CREDIT 

The  preceding  outline  sets  forth  some  of  the  most  im- 
portant phases  of  the  rural  credit  problem  in  the  United 
States.  To  meet  all  these  conditions  with  a  system  for 
financing  the  farmer  that  would  be  adaptable  to  all  parts 
of  the  country  and  to  all  classes  of  farmers  has  been  rec- 
ognized as  a  difficult  proposition.  For  the  purpose  of 
considering  the  subject,  a  conference  of  interested  dele- 
gates was  called  at  Nashville,  Tennessee,  in  April,  1912, 
and,  after  due  discussion,  it  was  decided  to  inaugurate  a 
movement  for  a  cooperative  credit  system  by  farmers  for 
farmers. 

As  a  preliminary  step  in  this  direction,  it  was  decided 
to  gather  together  a  national  representative  commission 
to  visit  Europe  for  the  purpose  of  studying  the  different 
systems  of  rural  credit  in  operation  there.  If  found  feas- 
ible, it  was  also  decided  to  adopt  them  as  a  basis  of  coop- 
erative rural  credit  in  this  country.  Under  this  resolu- 
tion, the  Southern  Commercial  Congress  brought  together 
about  seventy-five  delegates  from  different  states  and 
from  several  provinces  of  Canada,  and  this  body  is  known 
as  the  American  Commission. 

President  Wilson,  under  authority  of  Congress,  also 
appointed  the  United  States  Commission,  consisting  of 


The  Rural  Credit  Problem  159 

seven  members,  to  cooperate  with  the  American  Commis- 
sion in  the  investigation  and  study  in  European  countries 
of  "cooperative  land-mortgage  banks,  cooperative  rural 
credit  unions,  and  similar  organizations  and  institutions 
devoting  their  attention  to  the  promotion  of  agriculture 
and  the  betterment  of  rural  conditions." 

These  two  commissions  sailed  from  New  York  on 
April  26  and  returned  on  July  25,  1913.  A  vast  amount 
of  information  secured  on  this  tour  of  investigation  was 
published  by  the  government  as  Senate  Document  No. 
214,  63d  Congress,  1st  Session.  This  volume  contains 
more  than  900  pages.  It  presents  evidence  from  the  most 
authentic  official  sources  in  Europe  concerning  farm  con- 
ditions, the  extent  of  farmers'  organizations  and  their  rela- 
tion to  rural  credit  systems,  the  methods  of  granting  and 
protecting  loans  to  farmers,  government  aid  to  rural 
credit,  and  other  matters  having  a  bearing  on  the  problem 
of  financing  the  farmer. 

The  facts  on  European  agricultural  cooperation  and 
rural  credits  have  already  been  set  forth  in  Part  I  of  this 
volume.  The  next  thing  to  do  is  to  see  what  lessons  these 
facts  have  toward  formulating  a  credit  system  for  Ameri- 
can farmers.  In  view  of  the  great  difference  in  rural  con- 
ditions that  prevail  in  Europe  as  compared  with  those  in 
this  country  and  Canada,  the  problem  of  financing  the 
American  farmer  is  by  no  means  an  easy  one  to  solve. 
This  can  be  stated  as  a  recognized  fact  at  the  outset.  At 
the  same  time,  every  effort  should  be  made  to  deal  with 
the  subject  intelligently  and  conscientiously.  The  im- 
portance of  agriculture  as  a  great  and  growing  national  in- 
dustry is  a  sufficient  justification  for  undertaking  the  task. 


CHAPTER  X 
CONDITIONS  OF  RURAL  CREDIT 

Europe  has  its  lessons  for  American  farmers.  The  chief 
value  of  the  experience  of  European  farmers  in  building 
up  a  system  of  rural  credits  lies  in  the  possibility  of  sug- 
gesting a  constructive  credit  system  for  farmers  in  the 
United  States  and  Canada.  The  size  of  farms,  methods  of 
farming,  standards  of  farm  life,  general  rural  conditions, 
and  social  customs  are  much  alike  in  these  two  great  com- 
monwealths of  North  America.  If  a  rural  credit  system 
can  be  worked  out  for  farmers  in  the  United  States,  un- 
doubtedly it  could,  with  certain  modifications,  be  adapted 
to  farm  conditions  in  the  different  provinces  of  Canada. 
The  legislatures  in  both  countries  are  seriously  considering 
the  subject.  Therefore,  under  any  circumstances,  the 
experience  of  European  farmers  may  at  least  be  suggestive 
to  those  who  are  striving  to  formulate  a  sound  credit 
system  for  farmers. 

It  is  recognized  in  both  countries  that  agriculture  is 
one  of  the  most  important  of  industries.  The  number 
of  persons  engaged  in  it  far  exceed  the  number  employed 
in  any  other  single  industry,  and  the  wealth  annually 
produced  from  the  soil  surpasses  in  value  the  wealth  pro- 
duced from  any  other  single  source.  There  is  no  reason 
why  farmers  should  not  have  a  sound  credit  system;  and 
for  the  development  of  their  own  industry,  as  well  as  for 
our  national  welfare,  they  ought  to  have  it. 

160 


Conditions  of  Rural  Credit  161 

While  the  problem  of  rural  credits  is  of  great  importance, 
it  can  hardly  be  solved  apart  from  certain  definite  princi- 
ples of  social  economy  and  finance.  From  the  viewpoint 
of  social  economy,  it  is  all  summed  up  in  the  statement 
that  the  farmers  of  Europe  both  helped  themselves  and 
were  helped  to  formulate  their  credit  systems;  from  the 
viewpoint  of  finance,  the  farmers  sought  to  conduct  their 
industry  on  business  principles  and  to  procure  loans  on 
as  reasonable  terms  as  possible.  These  are  the  simple 
first  principles  on  which  the  European  rural  credit  systems 
were  established  and  were  developed  so  successfully. 

THE   NEED    OF   ORGANIZATION 

If  the  farmers  in  the  United  States  and  Canada  are  to 
depend  alone  on  their  mutual  help  to  provide  themselves 
with  money  for  personal  or  mortgage  credit,  the  need  of 
organization  seems  to  be  the  first  essential  factor.  One 
of  the  recognized  reasons  why  farmers  in  America  have  not 
been  able  to  secure  loans  on  such  favorable  terms  as  men 
engaged  in  the  industries  or  manufactures  is  because  of 
their  lack  of  organization.  The  natural  isolation  of  farm- 
ers as  a  result  of  their  calling  must  be  overcome  by  the 
social  spirit  which  calls  for  united  action  along  lines  which 
will  protect  and  promote  their  own  interests. 

In  this  respect,  European  farmers  passed  through 
precisely  similar  conditions  to  those  which  now  oppress 
American  farmers.  When  the  farmer  stood  alone,  as  he 
did  in  Europe  a  hundred  years  ago,  he  was  the  prey  of 
unscrupulous  usurers  and  money  sharks  who,  by  their 
pernicious  practices,  brought  both  the  individual  farmer 
and  agriculture  itself  to  the  verge  of  ruin. 


162  Principles  of  Rural  Credits 

The  need  of  protecting  the  farmer  against  unjust  debtor 
conditions  is  as  much  the  concern  of  the  state  as  it  is  of  the 
farmers  themselves.  Where  legislators  fail  or  refuse  to 
do  their  duty  in  this  regard,  the  value  of  organization 
among  farmers  for  forcing  the  issue  of  their  protection 
against  unreasonable  credit  conditions  and  demands  be- 
comes of  the  first  importance.  The  farmers'  cooperative 
societies,  already  organized  in  this  country  primarily  for 
marketing  their  products  more  advantageously,  should  be 
regarded  as  the  leaders  of  the  movement  toward  the  im- 
provement of  farm  credit  conditions. 

Very  little  progress  will  be  made  in  organizing  mutual 
credit  societies  among  farmers  unless  confidence  in  each 
other's  honesty  and  industry  is  first  encouraged.  Farm- 
life  conditions  here  place  farmers  at  a  great  disadvantage. 
In  European  countries,  the  farmers  of  a  given  district 
speak  the  same  language,  have  common  customs,  cultivate 
small-size  farms,  live  together  in  villages,  meet  together 
frequently,  have  similar  farm  practices,  and  know  each 
other's  traits  of  character  well.  How  different  all  this  is 
from  American  farm-life  conditions  is  too  well  known  to 
require  discussion.  Because  of  the  large  size  of  farms  in 
the  United  States  and  Canada,  the  farmers  of  a  given 
district  are  so  few  in  number  that  there  is  little  oppor- 
tunity for  forming  local  credit  societies  with  any  great 
prospect  of  success.  Credit  societies  in  rural  districts 
need  members  as  a  basis  for  organization.  Local  credit 
societies  could  not  very  well  enlarge  without  passing 
beyond  the  limits  set  by  financial  prudence  which  requires 
that  the  character  of  the  members  should  be  known  to 
each  other. 


Conditions  of  Rural  Credit  163 

But  even  with  this  drawback,  there  would  be  less  need 
to  restrict  the  size  of  the  district  for  local  credit  society 
purposes  under  American  farm-life  conditions  than  there 
is  in  Europe.  The  greater  use  of  the  telephone,  auto- 
mobiles, and  horse  vehicles  in  this  country  is  able  to 
bring  farmers  of  a  large  district  together  in  a  comparatively 
short  space  of  time.  By  these  means  a  larger  number  of 
farmers  could  meet  for  the  purpose  of  organizing  a  local 
rural  credit  society. 

But  this  would  raise  two  difficulties,  namely,  the  farm- 
ers of  a  large  district  would  not  know  each  other  inti- 
mately and,  in  case  of  the  organization  of  a  rural  credit 
society  for  making  personal  or  short-time  loans,  they 
would  not  be  near  enough  to  watch  over  each  other  to 
see  whether  or  not  loans  were  expended  for  the  purposes 
for  which  they  were  granted.  Moreover,  as  we  shall  see 
later,  there  is  not  so  much  need  of  the  farmers  organizing 
rural  credit  banks  as  there  is  of  protecting  them  against 
unscrupulous  money  lenders.  The  farmers  of  many 
parts  of  our  country  are  already  served  by  a  large  number 
of  small  country  banks  distributed  in  many  rural  districts. 
In  fact,  in  many  of  these  banks  the  farmers  themselves 
are  frequently  stockholders  and  directors,  and  they  re- 
ceive from  these  banks  a  reasonable  service  at  moderate 
rates  of  interest. 

MEMBERSHIP  AND   CAPITAL  OF  A   LOCAL  BANK 

It  seems  evident,  therefore,  that  on  account  of  the  large 
size  of  farms  and  the  state  of  isolation  of  farm  life  in 
America,  the  question  of  membership  for  the  successful 
operation  of  a  local  rural  credit  bank  would  have  to  be 


164  Principles  of  Rural  Credits 

seriously  considered.  In  Europe  some  of  the  local  societies 
have  a  membership  of  three  or  four  thousand,  while  the 
smallest  usually  have  two  or  three  hundred  members. 
When  dependence  is  placed  alone  on  mutual  help  among 
farmers  for  the  accumulation  of  the  money  with  which  to 
make  loans,  the  question  of  the  number  of  members  is 
vital  to  the  success  of  a  society.  If  a  society  were  organ- 
ized among  farmers  with  no  great  annual  money  income 
from  the  sale  of  their  products,  its  small  membership 
would  afford  little  prospects  of  ever  accumulating  sufficient 
capital  with  which  to  make  loans. 

This,  probably,  is  one  of  the  most  difficult  aspects  of 
the  rural  credit  problem  among  farmers  in  the  United 
States  and  Canada  from  a  strictly  cooperative  point  of 
view.  The  limited  number  of  members  personally  known 
to  each  other  and  the  limited  amount  of  capital  which 
could  be  subscribed  cannot  readily  be  overcome  under 
existing  farm-life  conditions.  Nor  would  it  be  desirable, 
for  the  mere  sake  of  organizing  local  rural  credit  soci- 
eties, to  have  farm  conditions  in  America  similar  to  what 
they  are  in  Europe.  Our  system  of  farming  and  our  rural 
life  conditions  are  typical  of  the  western  hemisphere. 
Both  are  open  to  improvement,  but  it  is  questionable 
whether  reducing  the  size  of  farms  and  adopting  a  com- 
munal farm  life  would  be  indicative  of  improvement. 
Without  a  more  dense  population,  however,  in  rural  dis- 
tricts, the  organization  of  a  local  cooperative  credit  bank 
of  the  Raiffeisen  type  has  these  difficulties  to  over- 
come. 

There  would  be  absolutely  no  use  in  organizing  a  credit 
society  of  this  type  for  the  mere  purpose  of  organization, 


Conditions  of  Rural  Credit  165 

without  regard  to  the  number  of  its  members  and  the 
prospective  amount  of  its  capital.  Both  elements  are 
essential  to  success.  In  some  localities  where  farms  are 
small  and  where  the  farmers  know  each  other  for  miles 
around,  there  local  rural  credit  societies  could  be  organ- 
ized with  the  prospect  of  success  providing  the  farmers 
are  well  enough  off  financially  to  furnish  the  necessary 
money  for  making  personal  loans.  The  cooperative 
character  of  such  a  bank,  of  course,  involves  the  perform- 
ance of  duties  on  the  part  of  some  of  the  members  without 
compensation.  In  fact,  for  the  organization  and  manage- 
ment of  such  a  bank  on  a  mutual  basis,  the  willingness  to 
make  personal  sacrifices  of  time  and  energy  is  absolutely 
essential.  Unless  the  leading  farmers  of  a  community 
are  prepared  to  do  this,  the  organization  of  a  rural  credit 
bank  had  better  not  be  undertaken.  The  aim  is  not  per- 
sonal gain,  but  the  welfare  of  the  community.  This  should 
animate  the  activities  of  rural  leaders  in  striving  to  pro- 
mote credit  among  farmers. 

But  how  many  districts  are  there  in  the  United  States 
or  in  Canada  where  enough  landowning  farmers  could 
be  brought  together  and  would  be  willing  to  form  a  co- 
operative credit  bank  on  Raiffeisen  principles?  The 
sole  purpose  of  such  a  bank  is  to  furnish  personal  or  short- 
time  credit.  Mortgage  credit  is  very  seldom  granted  by 
this  kind  of  bank.  Then  there  is  the  question  of  the 
liability  of  members  for  the  debts  of  the  bank.  Before 
any  attempt  is  made  to  organize  a  local  credit  bank,  these 
matters  should  be  carefully  considered  and  they  should 
settle  the  question  of  the  advisability  of  organizing  such 
a  bank  in  any  given  locality. 


166  Principles  of  Rural  Credits 

COOPERATIVE  FARM  MORTGAGE  SOCIETIES 

If  the  difficulties  are  great  with  reference  to  the  suc- 
cessful organization  and  management  of  local  rural  credit 
banks  for  personal  loans,  the  difficulties  are  no  less  when 
the  organization  of  a  cooperative  farm  mortgage  society- 
is  considered. 

The  Landschaften  were  organized  by  Prussian  noble- 
men who  held  very  large  estates.  Many  of  these  estates 
were  divided  into  numerous  farms  which  were  leased  to 
tenant  farmers.  When  the  income  from  these  farms  was 
not  always  sufficient  to  meet  the  expenditures  of  their 
owners  on  account  of  their  extravagant  mode  of  living, 
they  were  frequently  compelled  to  borrow  money  at  high 
rates  of  interest.  As  security  for  such  loans,  mortgages 
on  the  estates  would  be  given.  When  for  this  reason  and 
others  the  estates  had  become  greatly  incumbered  with 
indebtedness  and  difficulty  was  encountered  in  securing 
further  loans  except  at  most  usurious  rates  of  interest, 
the  Prussian  noblemen  were  driven  to  work  out  a  system 
of  land  mortgages  on  a  mutual  basis.  These  cooperative 
farm  mortgage  associations,  called  the  Landschaften, 
conceived  of  the  idea  of  issuing  bonds,  secured  by  first 
mortgages,  which  could  be  sold  on  public  stock  exchanges. 
This,  in  brief,  is  the  origin  of  the  farm-mortgage  bond. 
It  makes  land,  the  farmer's  best  asset,  far  more  liquid 
than  a  mortgage  does. 

But  how  different  this  is  from  the  state  of  affairs  among 
farmers  in  America.  While  there  are  many  large  estates 
scattered  throughout  this  country  and  Canada,  the  aver- 
age farm  is  only  about  138  acres  in  size.    In  all  probability, 


Conditions  of  Rural  Credit  167 

the  general  body  of  farmers  in  any  particular  county  or 
district  would  find  it  exceedingly  difficult  to  organize 
into  a  farm  mortgage  association  on  a  mutual  basis.  To 
do  this  they  would  have  to  pledge  their  lands  in  common, 
issue  bonds  to  the  amount  of  the  mortgages,  and  sell  these 
bonds  to  the  investing  public.  What  confidence  would 
investors  have  in  bonds  issued  by  local  mortgage  societies, 
even  if  farmers  were  willing  to  do  any  such  thing?  As 
worked  out  under  German  conditions  and  which  has  been 
perfected  during  more  than  a  century,  the  system  is  an 
excellent  one  and  has  served  a  very  useful  purpose.  It 
has  made  the  security  of  farm  lands  more  easily  sold  and 
has  placed  the  mortgage  on  a  long-time  basis,  on  easy 
terms  of  repayment,  and  at  reasonable  rates  of  interest. 

If  the  European  system  cannot  be  adapted  directly 
to  farm  conditions  in  the  United  States  and  Canada, 
nevertheless  farmers  should  aim  to  secure  these  results. 
The  methods  of  securing  them  may  be  modified  to  meet 
American  conditions.  It  is  exceedingly  doubtful  whether 
a  cooperative  farm  mortgage  credit  association  could  be 
organized  successfully  here;  but  the  principles  could  un- 
doubtedly be  adopted  under  state  supervision  to  the  great 
benefit  of  farmers  who  have  mortgages  on  their  farms. 
This  phase  of  the  subject  will  be  considered  more  fully 
when  the  subject  of  state  aid  to  agriculture  is  discussed. 

THE   DANGER   OF   DEBT 

Of  all  business  men,  farmers  should  be  the  first  to  hesi- 
tate about  involving  themselves  in  debt.  The  uncer- 
tainty attached  to  agriculture  makes  it  absolutely  im- 
possible for  any  farmer  to  foretell  what  his  income  will 


168  Principles  of  Rural  Credits 

be  at  the  time  of  harvest  or  when  he  comes  to  sell  his 
cattle.  If  staple  crops  are  being  cultivated,  a  glut  in  the 
market  may  lower  prices,  or  a  drought  or  flood  may  dimin- 
ish the  yield,  so  that  the  farmer's  calculations  as  to  his 
financial  resources  may  altogether  fail  him  when  the  time 
comes  for  the  payment  of  his  indebtedness.  If  live  stock 
are  being  raised  or  fattened  for  market,  the  high  cost  of 
feed  and  labor,  or  the  ravages  of  disease,  may  play  havoc 
with  a  stockman's  prospects  for  making  profits  when  he 
comes  to  sell. 

In  the  meantime,  if  money  has  been  borrowed  to  carry 
on  these  productive  enterprises  in  the  anticipation  of 
making  a  profit,  the  time  of  meeting  the  obligation  is 
drawing  nearer  with  absolute  certainty.  An  honorable 
debt  should  be  honorably  met  if  it  is  possible  for  the  farmer 
to  do  so.  But  this  cannot  always  be  done.  When  all 
the  farmer's  difficulties  are  taken  into  consideration,  it 
is  no  disgrace  that  he  cannot  always  pay  his  promissory 
note  when  it  becomes  due.  He  may  be  able  to  pay  the 
interest  though  compelled  to  ask  for  an  extension  of  time 
on  his  note.  This  the  European  cooperative  rural  credit 
banks  are  always  willing  to  do,  for  one  of  its  functions  is  to 
aid  the  farmer  under  just  such  circumstances.  But  a  limit 
is  placed  on  the  number  of  times  a  note  is  renewed,  and 
sooner  or  later  the  debt  has  to  be  paid.  But  in  America, 
where  there  are  no  local  credit  banks  to  aid  the  farmer,  a 
debt  always  rests  as  a  burden  on  the  farmer  and  causes 
him  no  end  of  uneasiness  and  worry. 

A  distinction  must  be  drawn  between  money  borrowed 
to  be  used  for  the  purchase  of  articles  for  consumption 
and  money  borrowed  for  a  productive  purpose.    Articles 


Conditions  of  Rural  Credit  169 

for  consumption  are  things  bought  to  satisfy  our  desires; 
while  articles  for  productive  purposes  may  be  seed,  fer- 
tilizers, tools,  and  so  on. 

No  farmer  ought  to  borrow  for  the  purchase  of  goods 
for  consumption,  like  food  and  clothing.  As  a  matter  of 
fact,  rural  credit  has  nothing  to  do  with  this  side  of  a 
farmer's  life.  The  purpose  of  organizing  rural  credit 
banks  is  to  promote  the  development  of  productive  enter- 
prises. It  may  be  asked,  What  is  the  difference  between 
a  farmer  buying  on  credit  and  borrowing  money  with 
which  to  buy  the  same  things  and  paying  interest  on  the 
loan?  As  a  general  rule,  there  would  be  little  or  no  differ- 
ence. The  merchant  who  sells  on  time  usually  figures  in 
enough  extra  profit  to  pay,  or  more  than  pay,  the  amount 
of  interest  that  would  accrue  on  the  loan  during  the  time 
the  store  credit  is  calculated  to  run.  From  this  point  of 
view,  the  creditor  of  the  farmer  is  both  a  merchant  and 
a  banker.  Financially  considered  the  practice  is  a  bad 
one  and  should  be  discouraged. 

Rural  credit  is  concerned  with  the  problem  of  making 
it  easy  for  the  farmer  to  borrow  money  for  productive 
purposes.  Even  here,  however,  a  farmer's  calculations  do 
not  always  materialize.  Productive  enterprises  are  under- 
taken in  expectation  that  the  increased  profits  resulting 
from  the  work  will  return  both  principal  and  interest, 
with  compensation  for  one's  labor.  But  the  farmer  who 
sows  cannot  be  sure  that  he  will  reap;  and  the  stockman 
who  buys  cattle  for  fattening  is  never  sure  how  soon 
disease  or  other  accident  may  ruin  his  prospects  of  profits. 
The  precariousness  of  any  line  of  farming  renders  it 
one   of  the  most  risky  industries  in  the  world,  for  no 


170  Principles  of  Rural  Credits 

farmer  can  be  certain  that  what  he  undertakes  as  a  pro- 
ductive enterprise  will  turn  out  to  be  so.  The  risks  of 
farming  are  incalculable. 

If  the  danger  is  great  of  being  unable  to  pay  money 
borrowed  for  productive  purposes,  what  shall  be  said  of  a 
debt  incurred  by  a  farmer  for  the  purchase  of  a  piano  or 
other  luxury?  To  have  good  credit  is  not  always  to  the 
best  interest  of  the  farmer.  He  may  involve  himself  and  his 
family  in  debt  beyond  his  ability  ever  to  redeem  his  bond 
so  long  as  he  lives.  A  member  of  a  Raiffeisen  rural  credit 
bank  in  Europe  could  not  do  that.  A  request  for  a  loan 
has  to  be  accompanied  with  a  written  statement  as  to 
how  it  is  to  be  expended.  If  the  committee  of  his  fellow 
farmer  members  deem  the  purpose  unlikely  to  be  profit- 
able, the  loan  is  refused.  This  protects  both  the  farmer 
and  the  organization  of  which  he  is  a  member.  The  great 
risks  of  farming  are  always  taken  into  consideration  as 
well  as  the  inexorable  return  of  the  day  when  the  debt 
has  to  be  repaid.  It  is  far  better  that  a  farmer  keep  out  of 
debt  than  to  have  the  most  satisfactory  credit  system 
possible. 

THE   SIGNIFICANCE   OF  INTEREST  RATES 

Of  course,  if  American  farmers  are  so  situated  by  farm- 
ing conditions  that  they  cannot  easily  form  local  rural 
credit  banks  or  farm  mortgage  credit  associations  on  a 
mutual  basis,  they  are  in  no  position  to  influence  the  rates 
of  interest  on  loans.  If  they  are  compelled  to  borrow 
money  and  are  able  to  do  so,  they  are  simply  at  the  mercy 
of  the  money  lender  whether  he  is  an  individual  or  a  bank. 

Now,  this  is  the  condition  in  many  parts  of  the  United 


Conditions  of  Rural  Credit  171 

States.  Interest  rates  vary  according  to  local,  county, 
or  state  conditions.  In  some  parts,  loans  to  farmers  may 
be  as  low  as  5  per  cent,  in  others  as  high  as  12  per  cent 
or  even  higher.  It  has  been  estimated  that  the  average 
rate  of  interest  is  83^  per  cent,  or  about  double  what  it  is 
to  farmers  in  Europe. 

This  increase  in  interest  rates  is  a  great  financial  burden 
on  American  farmers.  The  farm  mortgage  indebtedness 
in  the  State  of  New  York  has  been  estimated  at  about 
$100,000,000.  If  the  farmers  could  save  from  2  to  3  per 
cent  on  their  indebtedness,  it  would  mean  an  annual  saving 
of  two  or  three  million  dollars.  The  total  indebtedness 
of  farmers  in  the  United  States  has  been  estimated  at 
more  than  $6,000,000,000,  about  equally  divided  between 
mortgage  and  short-time  current  loans.  A  similar  saving 
in  interest  rates  on  this  enormous  indebtedness  would 
mean  an  annual  saving  to  our  farmers  of  a  sum  rang- 
ing anywhere  from  $120,000,000  to  $180,000,000.  This 
money  would  serve  a  far  better  purpose  in  the  pockets 
of  farmers  than  in  the  coffers  of  money  lenders. 

The  high  rate  of  interest  on  farm  loans  may  be  explained 
on  the  theory  that  when  there  is  less  money  for  loans  in  a 
community  than  is  required  by  borrowers,  interest  rates 
will  be  high  and  the  lenders  of  money  dictate  terms.  This, 
however,  is  hardly  likely  to  be  the  case  with  farm  loans 
for  the  reason  that,  when  money  has  to  be  borrowed  for 
farm  purposes,  usually  a  distant  town  or  city  bank,  mer- 
chant, or  private  money  lender  grants  the  loan. 

The  more  plausible  explanation  is  that,  in  addition  to  the 
effects  on  the  rates  of  interest  which  arise  because  farmers 
are  not  organized  and  because  farming  necessarily  carries 


172  Principles  of  Rural  Credits 

grave  risks,  there  is  the  direct  relation  between  interest 
rates  and  land  values.  Recent  investigations  by  the 
Wisconsin  Agricultural  College  have  emphasized  this 
fact.  Studies  were  made  on  interest  rates  in  two  counties, 
Dane  and  Rusk.  The  former  represents  a  long-settled 
county  in  which  land  values  have  reached  a  high  figure; 
whereas  the  latter  is  a  new  and  pioneer  county,  mainly 
agricultural,  and  land  values  are  low.  Interest  rates 
on  farm  loans  in  the  older  southern  county  were  found  to 
range  from  5  to  6  per  cent;  in  the  newer  northern  county 
they  ranged  from  6  to  10  per  cent.  In  Dane  County  the 
highest  kind  of  bank  loans  are  farm  mortgages  on  improved 
land,  for  the  farmer  can  often  secure  loans  at  cheaper 
rates  than  the  city  borrower  can  secure  them  on  real  estate. 
In  this  county  the  credit  wants  of  the  farmer  are  usually 
easily  met  at  reasonable  rates  because  farm  loans  are 
eagerly  sought  by  those  who  have  money  to  lend. 

But  in  the  newly-developed  Rusk  County,  as  well  as  in 
the  undeveloped  part  of  North  Wisconsin,  there  is  not 
sufficient  accumulated  money  to  meet  the  needs  of  these 
rural  communities.  There  farm-land  values  are  much 
lower  than  they  are  in  the  southern  counties,  where  a  high 
per  capita  of  wealth  obtains,  notwithstanding  the  fact 
that  large  sums  of  money  are  made  by  farmers  from  their 
first  crops  and  that  wonderful  stands  of  pine  and  hardwood 
forests  have  in  many  cases  contributed  much  to  the  agri- 
cultural development  of  these  sections.  Large  amounts 
of  money  are  still  needed  for  the  further  development  of 
Rusk  County;  consequently,  interest  rates  may  be  as 
high  as  10  per  cent  because  land  values  are  low.  Under 
these  conditions,  a  farm  settler  frequently  exhausts  his 


Conditions  of  Rural  Credit  173 

credit  without  being  able  to  finance  at  cheap  rates  his  real 
monetary  needs  for  both  current  and  mortgage  credits. 

As  a  means  of  aiding  to  meet  this  demand  for  loans,  the 
State  of  Wisconsin  passed  a  law  authorizing  the  formation 
of  cooperative  land-mortgage  banks,  and  three  such  banks 
were  organized  within  a  year.  To  what  extent  these  co- 
operative land-mortgage  banks  have  succeeded  in  meeting 
the  credit  wants  of  the  farmers  of  Rusk  County  has  not 
yet  been  reported. 

FARM   LOAN   CONDITIONS 

But,  after  all,  the  explanation  of  high  or  low  interest 
rates  is  not  as  important  as  the  facts  relating  to  the  con- 
ditions of  farm  loans  in  the  United  States. 

Personal  loans  are  usually  granted  for  periods  of  a  few 
months,  at  presumably  legal  rates  of  interest,  but  to  which 
commissions  or  premium  charges  are  frequently  added 
which  equal  or  even  exceed  the  lawful  interest  rate.  Mort- 
gage loans  are  generally  granted  for  three  or  five  years,  with 
commission  charges  on  loans,  expenses  for  drawing  and 
recording  papers,  and  other  items  of  cost  which  increase 
greatly  the  legal  interest  rates.  If  repayment  of  the  mort- 
gage debt  cannot  be  made  at  the  stipulated  time,  fore- 
closure proceedings  face  the  farmer  with  the  prospect  of 
losing  his  farm.  This  possibility  is  ever  present  on  the 
regular  mortgage  plan  of  a  short  time  and  a  lump-sum 
payment.  If,  however,  a  renewal  of  the  mortgage  is 
granted,  it  is  usually  by  the  payment  of  the  commission 
and  other  costs.  Thus  an  ordinary  farm  mortgage  loan 
is  a  source  of  worry  and  large  outlay  for  most  farmers,  and 
few  of  them  are  able  to  make  much  progress  in  paying  off 


174  Principles  of  Rural  Credits 

their  indebtedness  when  rates  of  interest  and  other  charges 
are  high. 

These  conditions  of  rural  borrowing  and  lending  are  not 
within  the  control  of  farmers.  As  already  stated,  for  thirty 
states  the  average  rate  of  interest  on  first-mortgage  farm 
loans  is  7  Vis  Per  cen^  and  for  personal  loans  8  2/s  per  cent, 
to  which  all  incidental  expenses  must  be  added.  Without 
the  aid  of  rural  credit  banks  for  personal  loans  or  coopera- 
tive farm  mortgage  associations  for  long-time  credit,  the 
farmer  is  practically  powerless  to  help  himself  when  it 
comes  to  borrowing  money.  He  is  in  no  position  to  dictate 
terms.  In  many  parts  of  the  country,  banks  make  no 
efforts  to  secure  the  farmer's  patronage.  In  the  South 
particularly,  loan  conditions  to  farmers  ought  to  be  revolu- 
tionized. Some  banks  which  make  small  loans  of  $5  to 
$25  ask  the  borrower  to  sign  waiver  notes  which  name  as 
collateral  security  mules,  wagons,  or  household  goods. 
For  this  service  the  banks  charge  from  50  cents  to  $1.10 
for  ten  to  thirty  days,  which  is  not  called  interest  but  a 
"premium."  This  is  the  practice  with  those  young 
farmers  who  do  not  do  business  regularly  with  the  bank. 

On  the  other  hand,  customers  who  deposit  regularly 
and  do  a  considerable  business,  if  they  wish  to  borrow 
$100  for  thirty  days  pay  12  per  cent  interest  a  year,  which 
is  as  long  as  a  loan  will  be  extended.  No  borrower  can  get 
a  loan  for  more  than  $1,000  and  that  must  be  secured  by 
first  mortgage  on  good  farm  property.  In  addition,  the 
borrower  pays  all  expenses  which  include  a  recording  fee 
ranging  from  85  cents  to  $10,  a  mortgage  tax  at  15  cents  a 
$100,  an  abstract  of  title  costing  from  $5  to  $50,  appraising 
property  at  a  cost  of  $5  to  $50,  notary  fees,  and  other 


Conditions  of  Rural  Credit  175 

items.  These  costs  add  greatly  to  the  interest  which  may 
range  from  8  to  15  per  cent.  If  the  legal  rate  of  interest 
is  8  per  cent  and  the  note  is  made  for  a  higher  rate,  the 
face  of  the  note  shows  no  interest  at  all.  The  interest 
rate  is  figured  in  as  principal,  and  the  note  is  made  to 
read  as  though  a  certain  sum  was  due  at  stated  times 
without  interest.  If  a  farmer  borrows  $100,  it  is  the  cus- 
tom of  the  bank  to  discount  at  the  agreed  rate  of  interest 
and  the  borrower  may  get  $70,  $80  or  $90,  whereas  the 
note  reads  $100  due  at  maturity.  All  this,  of  course, 
weighs  heavily  upon  a  struggling  farmer. 

THE    " ASHLAND   DAIRY   PLAN" 

In  contrast  with  what  has  been  set  forth  as  certain 
phases  of  banking  conditions  in  the  South,  a  noteworthy 
instance  of  banks  and  business  men  coming  to  the  aid  of 
struggling  farmers  is  what  is  known  as  the  "Ashland 
Dairy  Plan"  of  financing  the  farmer.  This  is  a  practical 
working  scheme  for  rural  credit  which  marks  the  broad- 
minded  policy  of  local  country  banks  in  a  number  of  dis- 
tricts of  northern  Wisconsin. 

This  plan  of  rural  credits  for  personal  loans  consists 
of  several  banks  uniting  to  lend  money  to  farmers  for  the 
purchase  of  dairy  animals.  At  the  same  time  the  business 
men's  associations  of  the  several  districts  guarantee  the 
farmers'  notes,  while  the  dairy  man  pledges  himself  to 
pay  each  month  on  the  loan  one-half  the  amount  of  his 
milk  check.  The  farmer  also  contracts  to  raise  all  his 
heifer  calves. 

The  Animal  Husbandry  Department  of  the  University 
of  Wisconsin  assisted  in  selecting  five  carloads  of  dairy 


176  Principles  of  Rural  Credits 

cattle  for  distribution  in  the  Ashland  district.  These 
animals  were  distributed  to  the  farmers  by  lot,  the  total 
expense  of  purchase  and  delivery  being  pro-rated  accord- 
ingly and  added  to  the  cost  price  of  each  animal.  Several 
carloads  were  also  purchased  for  the  districts  of  Iron  River 
and  Mellen,  and  the  plan  is  being  contemplated  in  numer- 
ous other  districts  in  Wisconsin. 

This  plan  of  rural  credit  has  been  so  successful  that  it 
has  already  been  adopted  by  thirty  counties  of  Minne- 
sota, and  by  several  communities  in  California  and  New 
York. 

The  interest  rates  charged  on  these  loans  are  the  pre- 
vailing rates  in  the  different  districts.  The  one  objection 
against  this  plan  is  the  rather  high  rate  of  repayment  on 
the  loan.  "One-half  the  amount  of  the  farmer's  milk 
check"  each  month  is  an  exceedingly  high  amortization 
rate.  If  the  rate  of  repayment  was  greatly  reduced,  the 
farmer  would  be  greatly  benefited  by  this  method  of 
credit. 

LEGISLATIVE   REQUIREMENTS 

These  are  some  of  the  most  important  rural  credit  con- 
ditions prevailing  in  the  United  States  which  call  for  leg- 
islative action.  Of  these  conditions  most  farmers  are 
unwilling  victims.  In  many  instances  they  are  bound  to 
use  them  or  be  deprived  of  credit  facilities.  Pressed  on 
one  hand  by  the  natural  conditions  of  agriculture  which 
make  their  industry  hazardous  and  sometimes  unprofit- 
able, and  pressed  on  the  other  hand  by  high  rates  of  in- 
terest, commissions,  and  other  exorbitant  costs  laid  upon 
them  by  unscrupulous  money  lenders,  many  farmers  are 


Conditions  of  Rural  Credit  177 

being  slowly  ruined  by  the  slow  grinding  of  the  millstones 
of  burdensome  indebtedness.  As  a  means  of  helping  them- 
selves, they  could  scarcely  form  credit  unions  with  ten 
to  twenty  members  with  any  great  hopes  of  financial 
success. 

In  the  demand  for  a  better  rural  credit  system  for  Ameri- 
can farmers,  they  are  not  asking  for  charity,  but  for 
justice.  The  farmer  is  ready  and  willing  to  meet  all  just 
claims  honestly  and  with  as  much  promptness  as  his 
business  permits.  But  the  importance  of  agriculture  to 
the  welfare  of  the  state  as  the  source  of  food  and  the  raw 
materials  of  manufactures,  as  well  as  the  economic  value  of 
the  farmer  as  the  agent  of  production  in  carrying  on  this 
necessary  industry,  would  seem  to  require  of  our  state 
legislatures  not  only  legal  protection  for  farmers  against 
illegal  methods  of  increasing  the  burden  of  interest,  but 
also  some  form  of  state  aid  in  their  behalf. 

Evidently,  the  conditions  of  rural  credits  in  America 
are  not  satisfactory  when  considered  as  a  whole.  It  has 
become  practically  useless  to  appeal  to  the  conscience  of 
the  unscrupulous  money  lender.  He  is  no  longer  the  sub- 
ject of  moral  suasion,  but  of  legal  prosecution  and  re- 
straint. Penalties  should  be  provided  for  adding  to  the 
rate  of  interest  by  indirect  charges  and  they  should  be 
made  as  severe  as  they  are  for  direct  violation  of  state 
laws  against  usury.  The  plea  of  the  farmer  for  a  better 
rural  credit  system  is  simply  the  echo  of  a  national  de- 
mand which  will  undoubtedly  lead  to  the  increased  wel- 
fare of  the  state. 


CHAPTER  XI 

PRELIMINARY  MEANS  OF  PROMOTING  RURAL 

CREDITS 

Since  the  conditions  of  agriculture  and  farm  life  are 
such  that  American  farmers  are  not  in  a  position  to  help 
themselves  readily  in  providing  either  personal  or  mort- 
gage credit  on  a  mutual  basis,  it  is  evident  that  means 
should  be  provided  for  them  to  some  extent  if  a  satis- 
factory system  of  rural  credits  is  to  be  established.  This 
can  be  done  either  by  means  of  private  capital  or  by  state 
or  national  aid. 

PROTECTION    FOR    FARMERS 

No  better  aid  could  be  granted  to  farmers  in  the  United 
States  than  by  the  passage  of  state  laws  which  would  aim 
to  protect  them  against  the  forms  of  credit  abuses  now 
practiced  and  to  some  of  which  attention  has  been  called 
in  the  preceding  pages.  All  states  have  attempted  to 
regulate  the  matter  by  fixing  a  maximum  legal  rate  of 
interest  that  can  be  charged  for  loans.  That  this  sort  of 
regulation  has  failed  in  many  states  is  very  well  known. 
Evidently,  our  legal  regulations  as  to  money-lending  by 
individuals,  banks,  or  other  financial  institutions  are  not 
sufficiently  thorough  to  prevent  credit  abuses. 

When  the  law  against  usury  can  be  so  easily  circum- 
vented by  the  method  of  charging  commissions,  premiums, 

178 


Promoting  Rural  Credits  179 

costs,  and  other  incidental  expenses,  the  expectations  of 
the  farmer  for  an  improvement  in  credit  conditions  will 
not  soon  be  realized.  These  extra  costs  often  more  than 
double  the  legal  rate  of  interest,  and  against  them  the 
farmer  seems  to  have  no  means  of  redress. 

It  is  by  all  odds  the  first  duty  of  the  state  to  provide 
the  farmer  with  protection  against  credit  abuses.  In- 
dividual farmers  may  plead  for  relief  and  the  agricultural 
press  may  continue  to  expose  credit  wrongs  from  now  till 
doomsday  without  making  the  slightest  impression  on 
the  conscience  of  some  money  lenders  and  without  chang- 
ing the  conditions  one  iota.  Such  credit  abuses  not  only 
exist  in  this  country,  but  they  are  in  practice  more  ex- 
tensively than  is  generally  supposed  or  known.  At  the 
same  time,  it  must  not  be  forgotten  that,  in  many  sections, 
farmers  are  being  faithfully,  honestly  and  legally  served 
with  credit  facilities  by  country  banks. 

More  stringent  laws  that  would  protect  the  farmer 
against  those  money  lenders  who  take  advantage  of  an- 
other's needs  would  in  no  sense  affect  the  persons  or 
financial  institutions  that  grant  loans  to  farmers  at  legal 
rates  of  interest  and  that  do  not  unduly  multiply  the  in- 
cidental costs.  That  there  is  need  of  such  laws  is  evident 
from  the  large  number  of  complaints  which  are  made 
when  farmers  try  to  borrow  money  at  the  terms  and  con- 
ditions demanded  by  money  lenders.  It  is  further  evident 
that  the  credit  facilities  now  afforded  farmers  in  some 
states  must  be  very  poor  or  else  they  would  not  be  driven 
to  the  necessity  of  borrowing  money  under  such  burden- 
some conditions. 

The  next  plain  duty  of  our  state  legislatures,  after  pass- 


ISO  Principles  of  Rural  Credits 

ing  more  stringent  laws  relating  to  the  taking  of  interest, 
is  to  enforce  such  laws.    A  law  unenforced  is  worse  than 
no  law  at  all.    It  is  demoralizing  and  has  a  bad  economic 
effect.    The  passing  and  enforcing  of  such  laws  would  have 
been  carried  out  long  ago  had  the  farmers  been  sufficiently 
organized,  as  they  are  in  many  European  countries,  to 
make  their  united  action  more  effectual  politically.    Farm- 
ers ought  to  organize  for  this  one  object  if  no  other,  in 
order  that  they  may  demand  the  legal  protection  against 
usurious  and  nefarious  credit  practices  to  which  as  citizens 
and  taxpayers  they  are  justly  entitled.     Legal  rates  of 
interest  are  always  high  enough  in  any  community  to 
compensate  the  creditor  for  the  use  of  his  money.    This 
fact  our  state  legislatures  have  duly  recognized  by  passing 
laws  to  regulate  the  rate  of  interest;  and,  while  few  persons 
deliberately  violate  the  laws  against  usury,  the  indirect 
methods  of  doing  so  are  so  numerous  and  so  effective 
that  the  laws  themselves  are  practically  of  little  or  no 
avail.     Therefore,  the  taking  of  commissions,  premiums, 
bonuses,  or  other  costs  which  indirectly  increase  the  legal 
rate  of  interest,  not  only  to  farmers,  but  to  all  other  bor- 
rowers, should  be  made  as  illegal  as  the  taking  of  usurious 
interest  directly.     This  would  be  a  very  important  pre- 
liminary step  toward  establishing  a  sound  rural  credit 
system  in  America. 

REDUCTION   OF   COSTS 

One  of  the  recognized  burdens  relating  to  farm  loans 
are  the  incidental  expenses  which  are  frequently  termed 
"costs."  This  may  include  charges  for  searching  the 
records,  drawing  up  papers,  making  court  records,  and 


Promoting  Rural  Credits  181 

many  other  items  that  add  to  the  bill  of  expenses  in  pro- 
curing a  loan. 

In  Europe,  nearly  all  processes  dealing  with  the  making 
and  recording  of  either  personal  or  mortgage  loans  are 
simplified  and  performed  as  cheaply  as  possible.  This 
is  of  great  benefit  to  borrowers.  In  some  instances,  the 
procedure  is  conducted  without  charge,  but  in  most  cases 
the  costs  are  reduced  to  the  minimum.  The  simple  life 
of  farming  populations  subjects  them  to  all  kinds  of  de- 
ception as  to  the  value  of  legal  and  other  services  relating 
to  loans.  This  frequently  leads  to  overcharges  for  per- 
forming these  services.  It  is  very  important,  therefore, 
that  all  kinds  of  protective  measures  shall  be  thrown  around 
the  farmer  by  the  state  in  order  to  aid  rural  interests. 
In  Europe  the  penalties  for  violation  of  these  restrictions 
are  so  severe  and  so  thoroughly  enforced  that  few  dare 
run  the  risk  of  breaking  the  law.  The  general  result  has 
been  that  usurers  have  largely  disappeared,  even  in  dis- 
tricts in  which  no  local  rural  credit  banks  operate.  On 
this  account,  farmers  can  usually  borrow  money  of  vari- 
ous institutions  at  a  charge  rarely  exceeding  6  per  cent 
which  includes  all  expenses.  The  advantages  to  the  farmer 
of  this  low  cost  of  borrowing  can  readily  be  conceived, 
and  it  is  especially  beneficial  in  localities  where  cooperative 
credit  societies  are  not  financially  strong. 

In  many  sections  of  the  United  States,  however,  the 
reverse  of  this  condition  prevails.  As  already  pointed  out, 
costs  and  incidental  expenses  are  frequently  excessive  and 
greatly  intensify  the  farmer's  burden  of  borrowing  money. 
This  is  a  factor  which  is  fast  ruining  the  farmer  and  is 
helping  to  increase  the  number  of  abandoned  farms.    It 


182  Principles  of  Rural  Credits 

is  particularly  true  with  reference  to  recording  farm  mort- 
gages. 

THE  TORRENS   SYSTEM 

As  a  means  of  relief,  what  is  known  as  the  Torrens 
system  of  registering  farm  titles  and  farm  mortgages 
has  been  advocated  for  the  United  States.  This  plan  was 
developed  by  Sir  Robert  Torrens  in  Australia  in  1858, 
and  was  later  adopted  in  England,  Canada,  some  countries 
of  South  America,  and  in  this  country  by  California, 
Colorado,  Illinois,  Indiana,  Massachusetts,  Michigan, 
Minnesota,  New  York,  Wisconsin,  and  possibly  other 
states.  New  York  passed  a  land-title  law  in  1908,  and 
the  Torrens  system  of  land  titles  was  authorized  under 
Article  12  of  the  Real  Property  Law  as  amended  by 
Chapter  627  of  the  Laws  of  1910.  Under  this  law,  a  state 
examiner  makes  an  examination  and  prepares  a  report 
on  the  records  of  a  property.  The  title  is  then  approved 
and  is  registered  by  a  New  York  Supreme  Court.  After 
that  the  title  cannot  be  questioned.  A  transfer  of  land 
is  made  by  simply  surrendering  the  old  certificate  and 
filing  a  new  one,  the  cost  of  which  is  two  dollars.  No 
lawyer  is  needed  to  make  a  search  of  title,  for  no  guaranty 
of  title  is  required  since  the  state  by  its  own  act  guarantees 
the  land  title.  In  case,  however,  the  state  examiner  over- 
looks some  factor  affecting  the  title  in  his  examination 
for  the  Torrens  title,  the  state  has  provided  an  assurance 
fund  in  order  to  compensate  any  landowner  for  loss  in- 
curred in  being  deprived  of  any  lawful  interest  in  his 
property  through  no  fault  of  his  own.  The  claim,  however, 
must  be  made  within  six  months  of  the  original  registra- 


Promoting  Rural  Credits  183 

tion  of  the  Torrens  title.  This  is  one  of  the  simplest, 
sanest,  safest  and  most  economical  methods  of  insuring 
title  to  farm  lands.  If  it  could  be  adopted  and  practiced 
in  every  state,  a  great  burden  would  be  taken  from  the 
shoulders  of  farmers  and  other  landowners. 

Unfortunately,  many  persons  and  title  companies  have 
opposed  the  introduction  of  the  Torrens  system,  having 
made  the  process  of  registration  as  costly  and  as  difficult 
as  possible.  In  some  states  a  suit  has  to  be  instituted  in 
a  court  of  record  to  quiet  title;  in  others  the  suit  has  to 
make  defendants  all  who  are  claimants  in  any  way  against 
the  property  and  even  fictitious  claimants  may  be  named. 
That  action  being  settled  in  favor  of  the  present  landowner, 
it  becomes  prima  facie  evidence  of  title. 

But  after  title  has  been  acted  on  by  a  state  court,  there 
remains  the  risk  that  the  title  is  not  clear.  In  California 
the  owner  is  required  to  give  a  bond  to  the  state  to  protect 
the  title;  in  New  York  and  in  other  states  an  assurance 
fund  is  provided  against  any  possible  loss  arising  in  this 
way.  Notwithstanding  all  these  difficulties,  the  cost  of 
registration  under  the  Torrens  system  is  less  than  the 
present  cost  for  making  an  abstract  of  title  each  time  prop- 
erty is  transferred.  That  the  Torrens  system  is  regarded 
as  the  better  system  is  shown  by  the  fact  that  the  demand 
for  its  adoption  comes  mostly  from  those  parts  of  the 
country  where  transfers  are  most  frequent. 

Evidently,  even  the  Torrens  system  can  be  made  less 
expensive  in  the  future  as  opposition  to  its  institution 
diminishes  on  the  part  of  those  who  engage  in  making 
abstracts  of  title  as  a  business. 


184  Principles  of  Rural  Credits 

PROTECTION   AGAINST   FORECLOSURE 

In  connection  with  the  high  costs  of  borrowing  is  the 
problem  of  mortgage  foreclosure.  As  a  rule,  one  follows 
the  other. 

Possibly  no  economic  evil  is  worse,  no  greater  iniquity- 
is  perpetrated,  than  that  which  springs  from  existing 
foreclosure  proceedings.  The  time  when  the  mortgage 
becomes  due  rolls  around  with  deadly  certainty,  and,  if 
repayment  of  the  debt  cannot  be  made,  the  debtor  can 
be  sold  out  to  satisfy  the  creditor's  claim. 

While  there  are  many  who  do  not  lend  money  with  any 
such  intention  in  view  as  the  foreclosure  of  a  farm  mort- 
gage or  the  seizure  of  a  farmer's  chattels  if  the  debt  can- 
not be  paid  at  the  stipulated  time,  there  are  others  who 
make  a  practice  of  just  this  thing.  The  farmer  or  other 
debtor  may  have  an  equity  in  his  property  equaling  two- 
thirds  or  more  of  its  value,  while  the  creditor's  lien  may  not 
be  one-third  the  property's  value.  But,  under  foreclosure 
proceedings,  the  debtor  is  liable  to  lose  all  he  owns  in  his 
property.  This  is  one  of  the  crying  evils  of  civilization — 
the  utter  disregard  of  the  debtor's  rights. 

That  there  is  need  of  immediate  and  radical  reform 
here  as  preliminary  to  a  sound  rural  credit  system  cannot 
be  doubted.  Some  of  our  progressive  states  have  taken 
steps  in  the  right  direction  to  reform  mortgage  foreclosure 
legislation.  The  State  of  Massachusetts,  for  example, 
passed  an  act,  approved  April  28,  1914,  to  facilitate  rural 
credits  and  to  enlarge  the  powers  of  credit  unions.  The 
incorporation  of  rural  credit  unions  was  made  possible 
by  Chapter  419,  Laws  of  1909,  and  the  law  of  1914  en- 


Promoting  Rural  Credits  185 

larges  the  powers  of  these  unions  by  permitting  them  to 
lend  money  on  the  security  of  first  mortgages  on  real 
estate.  To  facilitate  rural  credits,  the  law  provides  as 
follows : 

"Section  2.  Such  loans  shall  be  made  to  members 
only,  shall  in  no  case  exceed  in  amount  two-thirds  of  the 
value  of  the  property  pledged  as  security,  and  shall  be 
applied  to  the  following  purposes  only:  (a)  Clearing, 
draining  or  otherwise  reclaiming  and  permanently  im- 
proving agricultural  lands;  (6)  the  providing  of  facilities 
for  irrigation;  (c)  the  planting  and  early  care  of  orchards; 
(d)  the  erection  of  silos,  cold-storage  plants,  greenhouses 
and  permanent  farm  buildings;  (e)  the  purchase  of  farms 
and  farm  lands  for  personal  occupation  and  management; 
(/)  the  discharge  of  existing  farm  mortgages;  and  (g) 
subject  to  the  approval  of  the  bank  commissioner,  such 
other  improvements  of  a  permanent  nature  as,  in  the 
opinion  of  the  directors,  tend  to  develop  agricultural 
resources  and  to  increase  the  value  of  the  security.  The 
mortgage  deeds  securing  such  loans  shall  contain  a  pro- 
vision for  immediate  foreclosure  if  the  money  lent  is 
applied  in  whole  or  in  part  to  purposes  not  hereby  au- 
thorized, or  if,  in  the  opinion  of  the  directors,  it  is  being 
spent  unwisely  or  wastefully. 

"Sec.  3.  Loans  under  the  authority  of  this  act  shall  be 
for  the  term  of  forty  years;  but  the  borrower  may  repay 
the  whole  or  any  part  of  his  loan  on  any  day  on  which 
the  office  of  the  corporation  is  open  for  business.  For 
failure  to  pay,  when  due,  the  interest  or  any  installment  or 
additional  charge  required  by  the  terms  of  the  loan,  the 
borrower  may  be  fined,  if  the  by-laws  so  prescribe;  but 


186  Principles  of  Rural  Credits 

no  mortgage  shall  be  foreclosed  because  of  such  delayed 
payments  or  fines  unpaid,  until  the  sum  thereof  is,  in  the 
opinion  of  the  directors,  so  large  as  to  cause  the  total  liability 
of  the  borrower  to  exceed  two-thirds  of  the  value  of  the  prop- 
erty pledged.  The  loans  shall  bear  interest  at  a  rate  not 
exceeding  five  per  cent  per  annum,  payable  semi-annually, 
and  the  borrower  shall  also  pay  one  per  cent  a  year  to 
provide  for  the  amortization  of  the  loans,  together  with 
such  further  sum,  not  exceeding  one-half  of  one  per  cent 
a  year,  to  defray  the  expenses  of  management,  as  the  by- 
laws may  prescribe." 

While  this  is  a  step  in  the  right  direction,  it  is  not 
sufficiently  broad  to  cover  the  evils  of  mortgage  fore- 
closure. The  law  applies  to  rural  credit  unions  only, 
and  it  is  of  too  recent  origin  to  forecast  to  what  extent 
these  local  credit  unions  will  be  formed  and  how  far  they 
will  be  able  to  relieve  the  farm-mortgage  situation  in 
Massachusetts  if  they  should  be  formed.  But  the  sentence 
placed  in  italics  shows  that  the  farmer  debtor  is  to  be 
protected  against  foreclosure,  being  granted  every  op- 
portunity to  meet  his  obligations. 

To  make  this  law  really  progressive,  it  should  be  made 
to  apply  to  all  farm  mortgages.  The  Census  of  1910 
shows  that,  out  of  a  total  of  32,075  farms  in  Massachusetts, 
13,014,  or  41  per  cent,  are  mortgaged.  On  12,030  farms 
operated  by  owners,  the  mortgage  debt  reported  amounted 
to  $16,371,484,  or  an  average  mortgage  debt  of  $1,361  to  a 
farm. 

Certainly  it  will  take  a  long  time  for  rural  credit  unions, 
organized  and  financed  for  and  by  farmers,  to  solve  their 
farm-mortgage  problem  in  Massachusetts.    In  the  mean- 


Promoting  Rural  Credits  187 

time,  the  farmers  there  as  elsewhere  are  liable  to  become 
the  victims  of  the  great  evils  of  mortgage  foreclosure. 
Therefore,  it  would  be  the  part  of  wisdom  to  amend  the 
law  to  make  it  applicable  to  all  existing  and  all  future 
mortgage  loans  on  farms. 

There  is  no  economic  or  moral  reason  why  a  creditor 
should  be  given  a  legal  privilege  to  take  all  a  debtor's 
property  simply  because  the  creditor  has  a  mortgage 
which  covers  the  value  of  part  of  the  property  only.  All 
any  creditor  can  justly  claim  is  the  amount  of  his  loan, 
the  interest  thereon,  and  any  expenses  to  which  he  may 
have  been  put  in  the  case  of  a  forced  sale.  This  principle 
is  duly  recognized  by  state-controlled  mortgage  banks  in 
Europe.  It  is  based  on  equity  and  not  on  robbery  such  as 
existed  in  old  Roman  times  when  the  creditor,  in  case  of 
the  non-payment  of  his  claim,  was  given  possession  of 
both  the  debtor  and  his  family.  The  march  of  civiliza- 
tion has  modified  this  extreme  iniquity  by  limiting  the 
creditor's  claim  to  the  debtor's  property  rather  than  to 
his  person,  but  the  difference  is  only  one  of  degree  and  not 
one  of  principle.  To  permit  a  creditor  to  take  property 
worth  $5,000  for  a  debt  of  $1,000  is  to  legalize  a  system 
of  barefaced  robbery.  This  is  what  our  modern  system 
of  mortgage  foreclosure  too  often  permits. 

There  can  be  no  progress  in  our  credit  systems  and  no 
stability  to  rural  credits  until  a  radical  reform  is  instituted 
in  the  foreclosure  of  mortgages.  The  honest,  struggling, 
overburdened  debtor  should  be  protected.  The  whole 
purpose  of  law,  except  in  the  case  of  debtors,  is  to  protect 
the  weak  against  the  strong  and  unscrupulous.  But  our 
mortgage  system  does  not  encourage  this  principle.     A 


188  Principles  of  Rural  Credits 

farm  may  be  worth  $10,000,  on  which  there  may  be  a 
mortgage  of  $5,000.  By  some  misfortune  or  for  other 
reason  beyond  his  control,  the  debtor  may  not  be  able  to 
pay  a  lump  sum  of  $5,000,  plus  the  interest,  on  the  day 
set  down  in  the  instrument  for  payment.  The  property 
is  sold  under  foreclosure  at  auction.  The  purchaser  is 
usually  the  mortgage  creditor  or  his  agent  who  buys  in 
the  property  not  at  its  economic  value,  but  at  the  amount 
of  its  mortgage  indebtedness,  or  perhaps  a  trifle  more  to 
cover  expenses.  While  the  law  may  prescribe  that  any 
additional  price  shall  be  turned  over  to  the  debtor,  who 
ever  heard  of  a  debtor  getting  anything  except  ruination 
for  himself  and  family  when  mortgage  foreclosure  comes? 
This  is  the  great  dread  of  the  farmer  and  it  continues 
to  stay  with  him  so  long  as  a  mortgage  lies  on  his 
farm. 

Such  an  economic  policy  is  absolutely  wrong  and,  for 
the  welfare  of  the  country,  it  cannot  be  changed  too 
quickly.  No  farmer  should  be  deprived  of  the  equity 
he  owns  in  his  farm  by  foreclosure,  for  no  sane  man  wants 
to  lose  what  he  has  labored  a  lifetime,  perhaps,  to  ac- 
cumulate. If  a  debtor  cannot  meet  his  mortgage  when  it 
becomes  due,  it  is  safe  to  conclude  that  some  misfortune 
has  prevented  him  from  doing  so.  To  foreclose  a  mort- 
gage as  a  rule  is  simply  to  take  advantage  of  a  poor  man's 
necessity,  and  this  is  almost  as  bad  a  practice  as  down- 
right stealing.  It  seems  too  much  like  penalizing  a  debtor 
for  misfortune.  A  law  by  a  really  civilized  community 
would  give  no  advantage  to  either  debtor  or  creditor,  but 
would  aim  to  protect  both.  That  is  the  meaning  of 
equity,   and  surely  the  principles  of  equity  should  be 


Promoting  Rural  Credits  189 

practiced  where  it  concerns  the  retention  or  loss  of  one's 
home  or  farm. 

For  this  reason  our  state  legislatures,  if  they  are  really 
desirous  of  promoting  rural  credits,  should  give  im- 
mediate attention  to  mortgage  laws  that  will  seek  to  en- 
courage the  debtor  while  protecting  the  creditor  against 
loss.  If  they  are  unwilling  to  do  this,  it  will  be  a  difficult 
task  to  establish  a  sound  rural  credit  system. 

It  may  be  said  that,  if  changes  are  made  in  our  mort- 
gage laws,  they  may  play  into  the  hands  of  dishonest 
debtors  as  much  as  they  play  now  into  the  hands  of  un- 
scrupulous creditors.  A  farmer,  for  instance,  might  want 
to  get  his  equity  out  of  a  poor  farm  and  place  the  load 
on  the  mortgagee.  That,  of  course,  is  a  danger  to  be 
avoided.  When,  however,  it  is  taken  into  consideration 
that,  as  a  rule,  only  a  small  part  of  the  real  value  of  a 
farm  is  advanced  on  mortgage, — that  the  average  farmer 
is  not  only  honest  but  also  has  his  business  and  property 
at  stake, — there  would  be  very  few  who  would  be  willing 
voluntarily  to  abandon  their  farms  for  the  equity  they 
owned  in  them.  If  a  farmer  should  deliberately  neglect 
or  abandon  his  farm,  then  the  law  should  provide  for 
drastic  measures  to  protect  the  creditor.  The  property 
value  would  be  his  best  protection,  for  mortgages  are 
seldom  taken  for  more  than  half  the  appraised  value  of 
the  property. 

But  when  a  farmer  has  paid  his  interest  regularly  and 
is  struggling  to  pay  off  his  mortgage  debt,  he  should  be 
protected  against  loss  in  case  of  foreclosure  by  an  unscrupu- 
lous creditor.  Under  foreclosure  sale,  the  law  could  pro- 
vide that  a  farm  should  not  be  taken  over  by  a  creditor 


190  Principles  of  Rural  Credits 

except  by  either  paying  its  appraised  value  or  of  selling 
it  by  auction  for  not  less  than  the  appraised  value.  In 
that  case,  the  difference  between  the  price  and  the  in- 
debtedness— the  latter  including  the  amount  of  the  loan, 
interest  and  costs — should  go  to  the  debtor.  By  this 
means  both  parties  to  a  mortgage  contract  would  be  pro- 
tected. In  fact,  there  are  many  ways  in  which  a  mort- 
gage law  could  provide  much  better  for  the  equities  of 
both  debtor  and  creditor  than  now  prevails  in  nearly 
all  our  states. 

These  suggestions  are  made  only  in  view  of  the  con- 
tinuance of  our  present  crude  and  burdensome  mortgage 
system.  But  there  are  signs  that  the  system  is  about 
to  be  broken  down.  An  impression  is  fast  gaining  ground 
that  the  hope  of  definite  rural  progress  will  undoubtedly 
depend  upon  the  adoption  of  an  easier  method  of  paying 
off  mortgages,  such  as  has  been  so  successfully  worked 
out  in  Europe.  This  is  the  plan  of  paying  annually  or 
semi-annually  a  regular  sum,  a  definite  percentage  of 
which  is  applied  in  paying  off  the  principal,  so  that,  in 
the  course  of  time,  the  debt  is  paid  off  completely  and 
without  any  great  burden  on  the  farmer.  This  is  known 
as  the  amortization  of  mortgage  loans. 

The  plan  is  so  effective  in  relieving  the  industrious 
farmer  of  the  dread  of  foreclosure  while  permitting  him 
to  pay  off  as  much  more  of  the  mortgage  indebtedness  as 
he  pleases,  that  it  should  be  plainly  set  forth  before  Ameri- 
can farmers  for  their  serious  consideration. 


CHAPTER  XII 
THE  AMORTIZATION  OF  FARM  MORTGAGES 

According  to  the  Census  of  1910,  the  amount  of  farm- 
mortgage  debt  as  determined  from  the  reports  by  owners 
making  returns,  was  $1,726,172,851.  Many  farmers 
failed  to  report  their  mortgage  indebtedness,  so  that  the 
total  sum  would  materially  exceed  this  amount.  This 
gives  an  average  indebtedness  of  $1,715  to  the  mortgaged 
farm,  an  increase  of  40  per  cent  over  the  year  1890.  At 
6  per  cent  the  interest  paid  every  year  by  farmers  on  their 
mortgages  amounts  to  $103,570,370.  Evidently,  then, 
the  subject  of  farm-mortgage  indebtedness  is  a  very  im- 
portant one. 

How  shall  the  farmer  be  relieved  of  this  stupendous 
burden  which  is  crushing  both  him  and  agriculture? 
Under  the  straight  mortgage  system  that  has  been  prac- 
ticed in  this  country,  farm-mortgage  indebtedness  has 
increased  40  per  cent  in  twenty  years.  This  ratio  of  farm- 
debt  increase  certainly  cannot  continue  without  detri- 
ment to  the  progress  of  agriculture  and  to  the  national 
welfare. 

As  a  preliminary  statement  to  the  formulation  of  an 
entirely  different  plan  from  that  now  in  force,  it  may  be 
said  that,  on  the  basis  of  annual  repayments  on  the  prin- 
cipal of  1  per  cent  in  addition  to  the  interest,  this  whole 
indebtedness  could  be  wiped  out  in  forty  years.    Is  that 

191 


192  Principles  of  Rural  Credits 

worth  considering?  If  so,  it  only  depends  upon  our 
farmers  and  our  state  legislatures  to  put  the  system  into 
practice. 

AMORTIZATION   DEFINED   AND    ILLUSTRATED 

By  "amortization"  is  meant  the  method  of  paying  a 
debt  by  regular  semi-annual  or  annual  installments.  To 
illustrate: 

Suppose  a  farmer  gives  a  mortgage  on  his  farm  of  $1,000, 
with  interest  at  5  per  cent.  In  addition  to  the  interest, 
he  agrees  to  pay  2  per  cent  a  year  on  the  principal.  This 
makes  a  total  of  7  per  cent  a  year,  or  a  payment  of  $70, 
which  may  be  paid  in  two  semi-annual  installments  of 
$35  each.  The  first  year's  interest  and  payment  on  the 
principal  are  taken  as  the  amount  to  be  paid  annually. 
But  of  the  first  payment,  $50  represents  the  interest  and 
$20  the  payment  on  the  principal.  After  the  first  year's 
payment,  therefore,  instead  of  owing  $1,000,  the  farmer 
owes  only  $980,  with  interest  at  5  per  cent. 

For  the  sake  of  simplicity,  let  us  suppose  that  pay- 
ments are  made  annually.  When  the  next  time  of  pay- 
ment comes  around,  the  farmer  pays  his  $70.  Since  his 
debt  is  less,  the  interest  the  second  year  amounts  to  $49 
instead  of  $50,  and  therefore  the  payment  on  the  principal 
is  $21  instead  of  $20  as  it  was  the  first  year.  In  the  second 
year  the  debt  is  reduced  to  $959. 

On  the  return  of  the  third  time  of  payment  the  farmer 
pays  another  $70,  of  which  amount  $47.95  represents 
interest  and  $22.05  the  payment  on  the  principal.  This 
reduces  the  farmer's  mortgage  debt  to  $936.95. 

Now,  this  system  of  payment  and  method  of  reducing 


The  Amortization  of  Farm  Mortgages        193 

the  debt  continue  until  the  mortgage  has  been  lifted  by 
a  gradual  process.  Thus,  while  the  annual  payments  are 
always  the  same,  the  amount  of  interest  is  always  de- 
creasing and  the  amount  of  the  payments  on  the  debt  is 
always  increasing.  Consequently,  the  mortgage  is  paid 
off  in  ten  to  forty  years  according  to  the  rate  of  payment 
on  the  loan  that  the  debtor  himself  elects  to  pay  when 
the  contract  is  made.  This  is  the  simple  principle  of  amor- 
tization, and  it  is  recognized  in  Europe  as  the  safest, 
easiest  and  best  method  of  reducing  land-mortgage  in- 
debtedness hitherto  conceived  and  put  into  practice. 

ADVANTAGES  OF  AMORTIZATION 

An  erroneous  impression  prevails  among  many  farmers 
in  this  country  and  Canada  that  it  will  work  a  hardship 
on  them  to  carry  a  mortgage  for  thirty,  forty  or  fifty 
years,  even  if  the  repayment  of  a  mortgage  debt  is  made 
by  small  semi-annual  or  annual  installments.  This 
impression  arises  from  a  misunderstanding  regarding 
the  amortization  principle.  This  aims  to  relieve  the 
mortgage  burden  of  the  farmer  and  not  to  increase  it. 
Under  its  operation  in  Europe,  these  provisions  are  always 
made: 

1.  The  farmer  makes  his  own  choice  as  to  the  length 
of  time  he  desires  in  which  to  repay  his  mortgage  loan. 

2.  The  contract  stipulates  that  the  farmer  may  pay  off 
any  additional  part  or  all  of  the  loan  at  any  interest  period. 

By  these  two  flexible  conditions  of  repayment,  the  length 
of  time  a  mortgage  may  run  is  optional  with  the  farmer 
himself. 


194  Principles  of  Rural  Credits 

When  a  farmer  first  takes  out  a  mortgage,  his  prospects 
for  repaying  the  loan  may  seem  to  him  to  indicate  twenty 
years  as  sufficient  time  and  the  rate  of  amortization  on 
the  loan  is  fixed  accordingly.  If,  by  good  management  or 
as  a  result  of  favorable  seasons,  the  farmer  finds  that  he 
has  accumulated  cash  in  his  bank,  the  extra  money  can  be 
applied  on  the  loan  at  any  interest  period  thereby  repay- 
ing the  mortgage  so  much  the  quicker,  say  in  ten  or  fifteen 
years.  In  other  words,  the  amortization  of  farm  mort- 
gages practically  revolutionizes  the  financial  status  of 
the  farmer  by  making  him,  the  debtor,  and  not  the  creditor 
the  arbiter  of  the  time  when  a  mortgage  loan  shall  be 
repaid. 

Surely,  then,  amortization  is  a  great  advantage  to  the 
farmer.  It  takes  cognizance  of  the  precarious  nature  of 
the  farmer's  business  and  his  own  financial  condition. 
It  practically  abolishes  the  short-time  straight  mortgage 
loan  with  its  shadow  of  foreclosure  ever  threatening,  its 
expensive  renewal  charges,  and  its  likelihood  of  long  con- 
tinuance. Amortization  makes  it  possible  for  the  farmer 
to  pay  off  his  mortgage  debt  within  his  lifetime,  on  easy 
terms,  and  to  suit  his  own  convenience  and  financial  con- 
dition. By  this  method  of  payment,  the  farm  mortgage 
is  not  left  as  a  baneful  heritage  to  his  family  for  generation 
after  generation.  These  are  the  most  important  advan- 
tages to  the  farmer  of  amortization,  and  it  will  also 
rejuvenate  agriculture  in  America  if  put  into  general  prac- 
tice. The  financial  advantage  to  farmers  is  more  specif- 
ically shown  by  the  following  table  where  the  payments 
on  a  mortgage  for  $1,000  under  both  systems  are  con- 
trasted: 


The  Amortization  of  Farm  Mortgages         195 


Amortization  Mortgage 

Straight  Mortgage 

Amount  of 

Amount 

Payment 
No. 

Interest 
at  5% 

Paid  on 
principal 

mortgage 
debt 

Interest 
at  5% 

of  mort- 
gage debt 

1 

$50.00 

$20.00 

$980.00 

$50.00 

$1,000 

2 

49.00 

21.00 

959.00 

50.00 

1,000 

3 

47.95 

22.05 

936.95 

50.00 

1,000 

4 

46.85 

23.15 

913.80 

50.00 

1,000 

5 

45.69 

3£.<sl 

889.49 

50.00 

1,000 

6 

44.47 

"2r~  s2 

863.96 

50.00 

1,000 

7 

43.20 

26.80 

837.16 

50.00 

1,000 

8 

41.86 

28.14 

809.02 

50.00 

1,000 

9 

40.45 

29.55 

779.47 

50.00 

1,000 

10 

38.97 

31.03 

748.44 

50.00 

1,000 

11 

37.42 

32.58 

715.86 

50.00 

1,000 

12 

35.79 

34.21 

681.66 

50.00 

1,000 

13 

34.08 

35.92 

645.74 

50.00 

1,000 

14 

32.29 

37.71 

608.03 

50.00 

1,000 

15 

30.40 

39.60 

568.43 

50.00 

1,000 

16 

28.42 

41.58 

526.85 

50.00 

1,000 

17 

26.34 

43.66 

483.19 

50.00 

1,000 

18 

24.16 

45.84 

437.35 

50.00 

1,000 

19 

21.87 

48.13 

389.22 

50.00 

1,000 

20 

19.46 

50.54 

338.68 

50.00 

1,000 

21 

16.94 

53.07 

285.61 

50.00 

1,000 

22 

14.28 

55.72 

229.89 

50.00 

1,000 

23 

11.50 

58.50 

171.39 

50.00 

1,000 

24 

8.57 

61.43 

109.96 

50.00 

1,000 

25 

5.50 

64.50 

45.46 

50.00 

1,000 

26 

2.27 

45.46 

50.00 

1,000 

$797.73 

$1,000.00 

$1,300.00 

$1,000 

This   comparison   between   amortization   and   straight 
mortgages  shows  that,  on  a  mortgage  debt  of  $1,000 


196  Principles  of  Rural  Credits 

running  for  twenty-six  years  at  5  per  cent  interest,  the 
farmer  under  amortization  pays  in  interest  $797.73  and 
has  discharged  his  debt  by  paying  2  per  cent  on  the 
principal  each  year  in  addition.  But  under  a  straight 
mortgage  on  the  same  terms  as  regards  the  amount  of 
mortgage,  interest,  and  length  of  time,  the  farmer  pays 
$1,300  in  interest  and  still  owes  the  original  debt  of  $1,000. 
That  is,  the  farmer  has  paid  on  his  straight  mortgage 
$502.27  more  in  interest  than  on  the  amortization  plan 
and  still  owes  $1,000.  The  actaal  benefits  to  the  farmer 
by  amortization  are  that  he  saves  $502.27  on  the  amount 
of  interest  paid,  his  mortgage  of  $1,000  has  been  paid  off 
by  small  installments,  and  the  fear  of  foreclosure  has  not 
been  on  his  mind  during  the  period  of  26  years  the  mort- 
gage was  in  existence.  These  are  the  farmer's  rewards 
under  the  amortization  of  farm  mortgages. 

AMORTIZATION  IN   OPERATION 

As  a  matter  of  fact,  the  amortization  plan  of  paying 
off  farm  mortgages  has  been  put  in  operation  in  the  United 
States.  As  already  stated,  by  Chapter  437,  Massachu- 
setts Laws  of  1914,  it  is  provided  that  mortgage  loans 
granted  by  rural  credit  unions  shall  be  for  the  term  of 
forty  years,  but  that  the  borrower  may  repay  the  whole 
or  any  part  of  his  loan  on  any  day  on  which  the  office 
of  the  corporation  is  open  for  business.  The  loans  are 
to  bear  interest  at  a  rate  not  exceeding  5  per  cent  per 
annum,  payable  semi-annually,  and  the  borrower  also 
has  to  pay  1  per  cent  a  year  to  provide  for  the  amortiza- 
tion of  the  loan  and  a  further  sum,  not  exceeding  one-half 
per  cent  a  year,  to  defray  the  expenses  of  management 


The  Amortization  of  Farm  Mortgages         197 

of  the  credit  union.  Under  the  terms  of  this  law,  there- 
fore, by  the  payment  of  an  annual  sum  equivalent  to  Q% 
per  cent  a  year  on  the  original  amount  of  his  loan,  a  farmer 
can  wipe  out  his  mortgage  indebtedness  in  forty  years. 
The  borrower  also  has  the  privilege  of  reducing  the  length 
of  time  by  making  additional  payments  on  the  loan  at 
any  time  and  in  any  amount  to  suit  his  finances. 

The  State  of  New  York  revised  the  statutes  in  1914 
so  as  to  provide  for  a  central  land  bank  for  building  and 
loan  associations.  The  name  preferred  and  frequently 
used  is  savings  and  loan  associations.  These  institutions 
in  New  York  command  resources  amounting  to  about 
$65,000,000,  a  part  of  which  money  it  is  expected  will  now 
be  turned  into  channels  of  farm-mortgage  credit.  The 
new  banking  laws  provide  that  fifteen  or  more  persons  in 
any  locality  may  form  a  building  and  loan  association, 
while  seven  or  more  farmers  may  form  a  credit  union. 
Many  credit  unions  organized  as  associations  in  New  York 
are  making  efforts  to  come  in  under  the  new  credit-union 
law  and  thereby  reap  the  benefits  from  the  central  land 
bank. 

While  heretofore  the  building  and  loan  associations  have 
devoted  their  finances  and  energies  almost  entirely  to  pro- 
viding and  furnishing  homes  for  city  wage-earners,  it  is 
now  expected  that  they  will  extend  their  operations  to 
include  the  needs  of  farmers,  since  the  law  authorizes  the 
central  land  bank  to  issue  bonds  on  farm  mortgages  and 
offer  them  for  sale  to  the  investing  public. 

The  method  of  payment  proposed  for  farmers,  however, 
is  materially  different  from  the  usual  practice  of  building 
and  loan  associations.    As  a  rule,  city  members  subscribe 


198  Principles  of  Rural  Credits 

for  shares  of  stock  and  these  are  paid  for  usually  by 
monthly  installments  so  that  they  will  mature  in  ten  or 
twelve  years.  Suppose  a  member  subscribes  for  one  share 
worth  $100.  On  this  he  pays  50  cents  a  month  or  $6  a 
year.  If  loans  are  made  at  6  per  cent  interest,  the  shares 
will  mature  in  about  twelve  years.  The  member,  however, 
in  this  time  has  only  paid  in  about  $70  in  cash  payments; 
but  the  profits  have  been  annually  added  to  his  credits  so 
that  he  has  accumulated  $100,  or  the  face  value  of  his 
share.  If  he  is  a  borrower  of  the  association,  he  subscribes 
for  one  share  for  every  $100  borrowed  and,  besides  his 
regular  monthly  installments,  he  has  to  pay  interest  on  his 
loan. 

With  farmers,  however,  it  is  recognized  that  monthly 
payments  would  be  more  or  less  embarrassing.  It  is 
proposed,  therefore,  that  payments  by  farmers  be  made 
either  in  three  or  six  months  and  that  the  shares  and  mort- 
gages shall  mature  any  time  within  forty  years.  This  can 
be  done  by  making  the  annual  payments  on  the  mortgage 
1  per  cent  in  addition  to  the  interest.  If  the  New  York 
Land  Bank  shall  charge  4}4  per  cent  interest,  then  an 
annual  payment  of  53^  per  cent  of  the  original  amount  of 
the  mortgage  loan  will  leave  the  farm  clear  of  debt  in 
forty  years.  But  the  law  also  provides  that  any  part  or 
all  of  the  mortgage  may  be  paid  at  any  time  and  the  in- 
debtedness reduced  accordingly.  Further  to  protect  the 
farmer,  the  mortgage  cannot  be  recalled  until  maturity, 
providing  payments  are  made  regularly.  In  this  way  the 
State  of  New  York  proposes  to  finance  the  farmers  who 
are  landowners. 

In  Ohio,  the  building  and  loan  associations  have  for 


The  Amortization  of  Farm  Mortgages         199 

many  years  been  adapting  their  methods  of  organization 
and  work  to  the  needs  of  farmers.  Out  of  a  total  of  650 
associations  in  that  state,  more  than  500  furnish  mort- 
gage loans  to  farmers  which,  in  1913,  aggregated  about 
$12,000,000.  They  are  found  in  eighty-two  of  the  eighty- 
eight  counties  in  the  state,  and  in  every  one  of  the  eighty- 
two  counties  the  building  and  loan  associations  extend 
mortgage  loans  to  farmers.  These  are  made  up  to  half  the 
appraised  value  of  farms  at  6  per  cent  interest  payable 
quarterly  or  semi-annually.  The  Ohio  State  Department 
reports  that  the  loan  contracts  vary  from  one  to  sixteen 
years,  but  that  farmers  prefer  two  to  five  year  contracts. 
The  amortization  plan  of  repayment  is  practiced.  For 
example,  on  a  loan  of  $1,000  an  association  usually  re- 
quires, in  addition  to  the  interest,  an  additional  6  per  cent 
to  apply  on  the  principal.  On  this  basis  a  farm-mortgage 
loan  will  be  extinguished  in  twelve  years. 

The  State  of  Ohio  has  a  very  liberal  law  for  building  and 
loan  associations  and  also  provides  an  efficient  inspection 
department  especially  for  them.  In  this  way  the  state 
is  aiding  to  upbuild  farms  by  means  of  these  associa- 
tions. 

These  efforts  to  put  the  amortization  of  farm  mortgages 
on  a  working  basis  under  state  supervision  have  been 
supplemented  by  a  trust  company  or  bank  at  Joliet,  Illi- 
nois, which  has  put  the  plan  into  actual  operation.  The 
difference  between  public  and  private  effort  in  behalf  of 
the  farmer  is  well  worth  noting.  This  company  makes 
loans  on  farm  mortgages  which  are  deposited  with  another 
trust  company  in  Chicago.  The  loans  are  guaranteed  on 
the  basis  of  the  farm  mortgages  and  the  credit  of  the  Joliet 


200  Principles  of  Rural  Credits 

company.  The  latter  issues  bonds  or  debentures  for  one 
year  and  for  five,  ten  and  twenty  years  at  5  per  cent  in- 
terest. The  longest  farm-mortgage  loans  are  for  twenty 
years.  On  a  loan  a  farmer  pays  6  per  cent  interest  and 
about  2Y2  per  cent  on  the  principal.  On  a  mortgage  loan 
of  $1,000  payable  in  twenty  years,  the  semi-annual  in- 
stallment would  amount  to  $43.26.  The  bank,  therefore, 
which  issues  mortgage  bonds  at  5  per  cent  interest  and 
charges  the  farmer  6  per  cent  makes  a  profit  of  1  per  cent. 
On  a  cooperative  plan,  such  as  that  advocated  by  the 
states  of  New  York  and  Massachusetts,  this  extra  1  per 
cent  interest  could  be  saved  to  farmers  on  their  mortgage 
loans.  This  is  in  accord  with  experience  all  over  Europe, 
that  the  cooperative  method  of  granting  either  short- 
time  or  long-time  farm  loans  results  in  rates  of  interest 
which  range  from  Y2  to  2  per  cent  lower  than  loans  made 
by  private  capital. 

This  amortization  plan  by  the  Joliet  company  was  put 
in  operation  in  the  spring  of  1913,  the  mortgages  at  present 
being  limited  to  seven  of  the  best-established  counties  in 
the  State  of  Illinois. 

THE   OUTLOOK  FOR  AMORTIZATION 

The  large  difference  in  the  amount  of  interest  which  is 
paid  by  farmers  under  a  straight  mortgage  system  as  com- 
pared with  the  plan  of  amortization  makes  it  certain  that 
the  professional  money  lender  is  not  going  to  adopt  the 
latter  except  as  a  matter  of  necessity.  Only  two  alterna- 
tives are  possible  in  this  case:  Either  a  money  lender  is 
actuated  by  the  highest  patriotic  motives  in  voluntarily 
making  amortization  loans  to  farmers  or  the  law  has  been 


The  Amortization  of  Farm  Mortgages         201 

invoked  to  make  it  compulsory.  These  are  the  proposi- 
tions which  now  face  our  farmers. 

Now,  if  farmers  have  to  wait  until  the  amortization 
mortgage  plan,  which  works  so  admirably  to  their  advan- 
tage, is  going  to  come  into  general  use  as  a  result  of  the 
voluntary  action  of  private  money  lenders,  who  would  be 
the  losers  by  it,  that  would  be  like  waiting  a  thousand 
years  for  the  financial  millennium  day  to  make  its  appear- 
ance. The  prospects  for  this  result  are  not  very  encour- 
aging. 

But  if,  by  legal  enactment,  the  amortization  of  farm 
mortgages  should  in  future  be  made  compulsory,  then  it 
would  make'  little  difference  whether  the  farmers  them- 
selves, private  capital,  or  the  state  furnished  the  money  for 
this  purpose.  What  the  farmer  needs  more  than  anything 
else  are  mortgage  loans  at  reasonable  rates  of  interest,  the 
privileges  of  the  amortization  system,  and  protection 
from  the  evils  of  foreclosure.  If  the  amortization  of  farm 
mortgages  should  become  general  in  the  United  States, 
it  would  be  one  of  the  greatest  benefits  that  could  be  con- 
ferred on  agriculture  at  the  present  time. 


CHAPTER  XIII 
THE  ISSUE  OF  FARM-MORTGAGE  BONDS 

As  a  practical  part  of  the  system  of  amortization  of 
farm  mortgages  is  the  subject  of  mortgage  bonds  or  deben- 
tures. The  great  problem  is  to  make  the  farm  mortgage 
more  liquid, — that  is,  more  readily  turned  into  a  cash  asset 
in  cases  of  emergency.  The  experience  of  Europe  shows 
that,  by  means  of  bonds  or  debentures  which  are  issued 
to  the  value  of  the  mortgages  held  as  security,  the  farm 
mortgage  has  been  made  one  of  the  most  liquid  securities 
offered  to  the  investing  public. 

But  two  questions  on  this  subject  are  very  important: 
(1)  What  institutions  shall  have  authority  to  issue  mort- 
gage bonds?  and  (2)  How  shall  their  issue  be  regulated? 

PROTECTING    THE    INVESTOR 

One  of  the  chief  elements  in  the  success  of  selling  any 
representative  wealth,  such  as  stocks  and  bonds,  is  confi- 
dence in  the  value  and  stability  of  the  real  wealth,  or  secu- 
rity, on  which  they  are  based.  This  would  be  especially 
true  in  the  case  of  a  new  kind  of  security,  such  as  the 
farm-mortgage  bond,  which  is  new  to  investors  in  the 
United  States.  To  encourage  the  sale  of  mortgage  bonds, 
therefore,  it  is  absolutely  essential  that  no  question  can 
possibly  arise  as  to  their  marketable  value  at  any  time  on 
stock  exchanges,  subject,  of  course,  to  the  natural  fluctua- 

202 


The  Issue  of  Farm-mortgage  Bonds  203 

tions  of  the  stock  market.  If  this  value  can  be  guaranteed, 
there  is  no  reason  why  the  farm-mortgage  bond  cannot 
be  listed  among  the  best  of  American  securities. 

At  the  present  time,  there  is  a  strong  general  demand  for 
the  establishment  of  a  sound  rural  credit  system  in  the 
United  States  and  Canada.  There  seems  to  be,  however, 
a  tendency  on  the  part  of  private  capitalists  to  take  ad- 
vantage of  this  demand  by  advertising  farm-mortgage 
bonds  for  sale  to  investors.  This  threatens  the  stability 
of  mortgage  bonds  issued  under  state  supervision  by 
farmers'  cooperative  associations,  and  it  also  places  a 
great  risk  on  honest  investors. 

Farm-mortgage  bonds  issued  by  private  concerns  may 
or  may  not  be  all  right.  What  guaranty,  however,  does 
the  investor  have  that  there  is  any  farm  land  or  real  es- 
state  to  support  the  bonds?  What  guaranty  does  he  have 
as  to  the  value  of  the  farm,  as  to  the  ratio  of  bond  issue 
to  farm-land  values,  or  as  to  the  value  of  the  bonds  issued 
to  the  mortgages  themselves? 

No  greater  injury  can  be  done  to  the  farmer's  best 
asset — his  land — than  to  permit  any  concern  to  issue 
farm-mortgage  bonds.  If  no  legal  restrictions  are  placed 
on  the  issue'  of  bonds  on  real  property  such  as  farms, 
the  door  will  be  opened  to  all  manner  of  crookedness  in 
real-estate  transactions.  If  any  private  concern  shall 
have  the  right  to  issue  bonds  on  first  mortgages,  a  firm 
could  purchase  a  farm  worth  $10,000  and  immediately 
issue  bonds  to  the  value  of  $100,000  and  sell  them  to  the 
public  if  they  could  find  purchasers  for  them.  Here  would 
be  a  real  value  of  $10,000  and  a  paper  value  of  $90,000 
that  would  be  worthless.    What  is  to  prevent  this  very 


204  Principles  of  Rural  Credits 

thing  from  taking  place?  This  would  be  wild-eat  finan- 
ciering ruinous  to  investors  and  a  discredit  to  sound 
farm-mortgage  bonds.  In  its  intent  such  a  scheme  is 
not  much  better  than  counterfeiting.  The  farmer's 
credit  would  be  ruined  by  any  such  policy  in  a  short 
space  of  time. 

The  issue  of  farm-mortgage  bonds  without  some  kind 
of  thorough  state  supervision  should  be  prohibited  in 
the  United  States.  In  Europe  this  is  the  basis  of  all  farm- 
mortgage  bond  issues  and  redemptions.  The  state  pro- 
tects investors  and  upholds  farmers'  organizations  by 
its  strict  rules  and  regulations  regarding  the  issue  of 
farm-mortgage  bonds. 

STATE    CONTROL    OF   MORTGAGE    BOND   ISSUES 

In  New  York  and  Massachusetts,  where  the  issue  of 
farm-mortgage  bonds  is  permitted  by  law,  the  State 
Land  Bank  and  the  farmers'  credit  unions  are  designated 
as  the  institutions  to  issue  them.  The  New  York  law  of 
1914  gives  authority  to  the  land  bank  to  sell  farm-land 
bonds  under  state  regulations.  These  bonds  are  to  be 
secured  by  first  mortgages  on  real  estate,  preferably  on 
farms  under  cultivation,  for  loans  made  up  to  75  per  cent 
of  the  appraised  value  of  the  farm  on  which  the  loan  is 
made,  and  the  state  sees  to  it  that  each  issue  of  bonds 
sold  is  secured  by  such  a  mortgage.  This  provision  will 
make  the  State  Land  Bank  bonds  one  of  the  safest  forms 
of  security  for  investments  in  New  York. 

Sections  4  and  5  of  the  Massachusetts  act  relating  to 
rural  credit  unions  provide  as  follows: 

'•  Credit  unions  may,  with  the  approval  of  the  bank 


The  Issue  of  Farm-mortgage  Bonds  205 

commissioner,  issue  non-taxable  forty-year  debenture 
bonds  to  an  amount  not  exceeding  eighty  per  cent  of  the 
total  mortgage  loans  outstanding  at  the  date  of  issue.  The 
bank  commissioner  shall,  at  least  twice  a  year,  examine 
all  credit  unions  issuing  such  bonds,  and  may  require 
the  retirement  of  any  debenture  bonds  outstanding  in 
excess  of  the  said  eighty  per  cent.  In  case  of  such  retire- 
ment, bonds  to  the  required  amount  shall  be  called  for 
payment  in  the  order  of  their  issue,  and  interest  upon 
bonds  so  called  shall  cease  after  such  date  as  the  bank 
commissioner  may  prescribe.  In  case  of  failure  of  a 
credit  union  to  pay  the  interest  upon  its  debenture  bonds 
or  the  principal  when  due.  the  debenture  bonds  shall  be 
an  underlying  hen  on  all  its  assets,  and  the  bank  com- 
missioner shall  at  once  take  possession  of  said  assets  and 
wind  up  the  affairs  of  the  corporation. 

''Before  a  credit  union  shall  make  any  mortgage  loans 
or  issue  any  debenture  bonds  under  the  authority  of  this 
act.  it  shall  make  such  provision  in  its  by-laws  for  the 
application  of  principal  installments  to  the  amortization 
of  loans  as  the  bank  commissioner  shall  certify  to  be  just 
both  to  the  borrower  and  to  the  holder  of  the  debenture 
bonds.  By-laws  so  made  and  approved  shall  not  be 
changed  without  the  approval  of  the  bank  commissioner, 
and  he  shall  have  power  to  require  the  by-laws  to  be  revised 
from  time  to  time  and.  if  necessary,  to  secure  their  enforce- 
ment by  mandamus  proceedings  in  the  superior  court." 

The  State  of  Massachusetts  by  this  law  has  provided 
for  supervision  over  the  issue  and  redemption  of  farm- 
mortgage  bonis.  This  is  as  it  should  be.  since  it  protects 
investors  against  loss  from  the  issue  of  an  excessive  valua- 


206  Principles  of  Rural  Credits 

tion  of  bonds  and  makes  the  debenture  bonds  issued  by 
farmers'  credit  unions  a  reliable  security.  No  better 
means  for  encouraging  agriculture  and  laying  the  basis 
of  sound  rural  credits  has  been  put  into  practice  in  any 
state  than  the  law  enacted  by  Massachusetts. 

By  the  plan  of  amortization  and  the  issue  of  farm- 
mortgage  bonds,  New  York  and  Massachusetts  have  made 
provision  for  improving  rural  credit  conditions  in  those 
states.  The  savings  and  loan  associations  in  the  State  of 
New  York  may  organize  with  fifteen  persons,  either  men 
or  women,  and  operate  within  a  district  or  territory  em- 
braced within  a  radius  of  fifty  miles.  These  associations 
may  become  members  of  the  State  Land  Bank  and  avail 
themselves  of  its  benefits  by  borrowing  on  first  mortgage 
at  reasonable  rates  of  interest  and  on  the  installment  plan 
of  repaying  the  loan. 

Sufficient  time,  however,  has  not  yet  elapsed  to  deter- 
mine whether  or  not  New  York  farmers  will  find  this  plan 
adapted  to  their  isolated  farm  life.  A  radius  of  fifty  miles 
is  a  large  territory  within  which  for  all  farmers  to  know 
each  other  and  be  intimately  acquainted  with  each  other's 
habits  of  industry  and  personal  character.  Neither 
Massachusetts  nor  New  York  in  any  way  offers  financial 
aid  to  the  farmers  by  proposing  to  lend  state  money  for 
personal  or  mortgage  credit,  but  they  do  propose  to  pro- 
tect investors  in  farm-mortgage  bonds  by  their  system 
of  state  supervision.  These  are  steps  in  the  right  direction 
for  placing  farm-mortgage  credit  on  a  reasonable  and 
sound  basis.  There  are  other  states,  however,  which  have 
taken  another  course  in  financing  their  farmers  by  lending 
state  funds  to  farmers  on  regular  mortgage  loans.     In 


The  Issue  of  Farm-mortgage  Bonds  207 

fact,  the  extent  to  which  the  funds  of  states  and  large 
financial  corporations  are  now  invested  in  farm  mortgages 
is  not  generally  understood.  It  will  be  worth  while, 
therefore,  to  discuss  briefly  this  phase  of  rural  credits  in 
the  United  States. 

Although  the  data  on  this  subject  are  more  or  less  in- 
complete, the  facts  as  ascertained  will  show  that  large 
sums  of  money  are  now  invested  in  farm-mortgage  loans 
at  reasonable  rates  of  interest.  If  the  costs  of  making  loans 
to  farmers  by  large  financial  corporations  could  be  reduced 
to  moderate  limits,  the  need  for  the  organization  of  farm 
mortgage  mutual  credit  associations  would  not  be  so 
greatly  felt  by  the  farmers  in  the  United  States  and 
Canada  as  it  is  at  the  present  time. 


CHAPTER  XIV 
REGULAR  MORTGAGE  LOANS  TO  FARMERS 

While  the  amortization  plan  of  redeeming  farm- 
mortgage  loans  is  to  be  preferred  to  any  other,  every  other 
means  of  aiding  the  farmer  should  be  appreciated  until 
it  shall  come  into  more  general  use.  As  a  matter  of  fact, 
there  are  several  agencies  now  making  regular  mortgage 
loans  to  farmers  at  reasonable  rates  of  interest.  Con- 
sequently, they  are  of  great  direct  benefit  to  the  farmer 
and  of  indirect  advantage  to  agriculture  and  the  nation 
at  large. 

The  legitimate  investment  of  capital  in  farm  mortgages 
by  large  financial  institutions  is  on  the  increase,  presum- 
ably because  the  safety  of  these  investments  is  the  first 
consideration  rather  than  a  high  rate  of  interest.  This 
tendency  speaks  well  for  the  future  financing  of  the 
farmer,  especially  if  state  authorities  can  be  aroused  to  the 
extent  and  evil  of  the  present  commission  system  connected 
with  farm  loans. 

As  a  rule,  farmers  have  resorted  for  loans  to  private 
individuals,  banks,  insurance  companies,  local  brokers, 
real-estate  dealers,  and  mortgage  firms.  In  most  instances, 
the  money  secured  as  loans  by  farmers  from  these  sources 
belongs  to  a  third  party,  and  the  bank  or  firm  acts  only  as 
broker  and  makes  a  commission  out  of  the  transaction. 
This  method  of  borrowing  simply  increases  the  burden 

208 


Regular  Mortgage  Loans  to  Farmers         209 

of  the  debtor,  since  the  commission  or  fee  has  to  be  paid 
by  the  borrower  and  not  the  lender.  The  result  is  that 
the  legal  rate  of  interest  on  loans  is  thereby  increased. 

It  has  been  the  aim  of  some  agencies  in  this  country  to 
make  direct  loans  to  farmers  on  first  mortgage  as  a  means 
of  aiding  agriculture.  Among  these  agencies  are  some  of 
the  states  and  many  large  insurance  companies.  The  total 
investments  in  farm  mortgages  from  these  sources  in  the 
United  States  amount  to  a  very  large  sum. 

STATE  LOANS  TO   FARMERS 

Several  states,  recognizing  the  importance  of  agriculture 
for  promoting  the  general  welfare  and  the  superior  stability 
of  farm  mortgages,  have  set  apart  funds  for  the  express 
purpose  of  making  loans  to  farmers.  This  form  of  state 
aid  should  certainly  be  encouraged  for  two  reasons:  (1) 
Because  a  state  government  thereby  protects  its  most 
necessary  industry  against  the  unscrupulous  money  lender; 
and  (2)  because  the  example  of  the  state  will  encourage 
the  investment  of  private  or  institutional  surplus  funds 
in  farm  mortgages. 

One  of  the  easiest  methods  of  saving  the  farmer  and 
other  borrowers  from  the  unscrupulous  money  lender  is 
by  providing  facilities  for  securing  loans  on  reasonable 
terms.  This  is  almost  as  good  as  state  legislation  which 
hitherto  has  been  too  lax  to  afford  debtors  the  protection 
to  which  they  are  entitled.  No  sane  farmer  would  pay 
5  per  cent  interest  and  10  per  cent  commission  for  a  loan 
if  he  could  procure  the  loan  without  having  to  pay  the 
commission.  The  private  money  lender  in  many  states 
can  frequently  bleed  the  farmer  who  borrows  because  he 


210  Principles  of  Rural  Credits 

is  unable  to  procure  loans  at  banks  as  easily  as  merchants 
or  manufacturers. 

If  a  state  should  provide  money  for  the  purpose  of 
making  loans  to  farmers  at  a  nominal  rate  of  interest  and 
with  all  other  charges  modified  to  cover  actual  costs  only, 
a  successful  way  would  be  opened  to  aid  the  farmer  and 
promote  agriculture  at  the  same  time.  This  kind  of  state 
aid,  therefore,  should  have  the  support  of  all  intelligent 
workers  who  are  eager  to  promote  the  general  welfare. 
It  has  seemed  to  some  that  state  aid  has  a  tendency  to 
make  the  farmer  less  self-reliant.  In  advancing  loans  from 
state  funds,  however,  at  legal  rates  of  interest,  the  farmer 
is  placed  on  his  own  resources,  as  much  so  as  if  he  were 
borrowing  from  a  private  individual  or  firm.  The  only 
difference  is  that  the  farmer  has  no  extra  costs  or  commis- 
sions to  pay.  Moreover,  that  state  loans  of  this  character 
do  not  make  the  farmer  less  self-reliant  is  shown  by  the 
fact  that  farmers  are  among  the  most  prosperous  in  the 
country  in  those  states  where  loans  are  made  to  them. 

The  practice  of  lending  state  funds  on  farm  mortgages 
is  not  very  general.  Where  loans  of  this  nature  are  made, 
the  fund  is  not  only  limited,  but  the  amount  that  can  be 
loaned  on  mortgage  is  also  limited  to  a  certain  percentage 
of  the  value  of  the  land.  Most  of  the  money  loaned  by 
states  are  school  funds,  and  great  care  is  taken  to  lend 
money  only  on  good  farms  managed  by  the  best  trained 
farmers.  While  this  is  a  wise  precaution  from  a  financial 
and  business  point  of  view,  it  is,  evidently,  not  a  credit 
system  of  state-wide  application;  for  the  farmer,  perhaps, 
who  is  most  in  need  of  a  loan  is  not  necessarily  reached  by 
state  loans  made  under  these  conditions.    The  following 


Regular  Mortgage  Loans  to  Farmers  211 

table  gives  a  summarized  statement  as  to  the  amount  of 
loans,  rates  of  interest,  and  the  limit  of  loan  to  the  value 
of  land  as  practiced  by  various  states: 


State 


Idaho 

Indiana 

Iowa 

North   Dakota 
Oklahoma .... 

Oregon 

South  Dakota . 


Amount 
loaned 


$1,500,000 
Small  sum 
$4,500,000 
1,680,000 
5,000,000 
5,000,000  + 
6,000,000  + 


Utah 1,000,000  + 


Rate  of 
interest  on 
state  loans 


Limit  of 

loan  to 

value  of 

land 


5  to  6 
5 
5 
6 
5 
6 


7  per  cent 

6     " 
ti 


<< 
<< 


One-third 

Unknown 

Unknown 

One-third 

One-half 

One-third 

One-third 

Two-thirds 


Average  rate 

of  interest 

on   mortgage 

loans 


8 . 3  per  cent 

5.6 

5.6 

7.8 
7.2 

8.1 
8.1 
8.7 


The  +  sign  means  that  more  than  the  sum  designated  is  loaned 
to  farmers  on  land  security,  the  exact  amount  not  being  reported. 

While  the  total  amount  of  these  state  loans  to  farmers 
is  quite  a  large  sum  which  has  been  advanced  for  many 
years,  the  records  show,  nevertheless,  that  the  losses  on 
these  loans  have  been  insignificant.  This  not  only  speaks 
well  for  the  farmers  in  the  different  states,  but  proves  the 
stability  of  farm-mortgage  security  as  an  investment  for 
public  funds. 

The  most  noticeable  feature,  however,  about  these  state 
loans  to  farmers  is  that  they  are  from  one  to  three  per 
cent  lower  in  interest  rates  than  loans  by  private  individ- 
uals, banks  and  other  institutions  in  the  different  states. 
The  annual  saving  to  farmers,  therefore,  in  interest  alone 


212  Principles  of  Rural  Credits 

in  these  states  is  quite  a  large  sum,  and  this  is  a  great 
financial  advantage.  But  renewal  charges  and  other  in- 
cidental expenses  are  also  lower  with  state  loans  than  with 
others  from  private  sources,  so  that  the  plan  of  making 
direct  loans  to  farmers  of  school  funds  by  the  different 
states  has  not  only  promoted  a  better  system  of  rural 
credit,  but  has  been  of  financial  benefit  to  the  state  itself 
by  the  profitable  investment  of  some  of  its  public  funds. 

As  already  mentioned,  the  State  of  Ohio,  instead  of 
making  direct  loans  to  farmers,  has  encouraged  the  build- 
ing and  loan  associations  to  utilize  their  funds  for  this 
purpose.  This  has  largely  taken  the  place  of  direct  state 
loans  in  Ohio,  and  it  is  to  be  preferred  to  them  because 
in  most  instances  the  loans  are  made  on  the  amortization 
plan.  In  certain  agricultural  sections  of  Ohio,  there  are 
associations  which  mainly  loan  on  farms,  but  as  a  rule  the 
building  and  loan  associations  combine  both  city  and  farm 
loans.  The  average  rate  of  interest  on  farm  loans  in  Ohio 
is  quite  low,  being  only  5.7  per  cent.  This,  however,  does 
not  include  charges  for  abstracts  and  other  incidental 
expenses.  On  the  other  hand,  the  rate  charged  by  building 
and  loan  associations  is  6  per  cent,  to  which  other  incidental 
expenses  must  be  added.  While,  therefore,  the  loans  made 
by  these  associations  to  farmers  are  along  strict  business 
lines,  they  are  probably  as  favorable  as  state  loans  to 
farmers  in  the  end,  because  of  the  advantage  which  springs 
from  amortization.  The  interest  rate  on  farm-mortgage 
loans  made  by  the  building  and  loan  associations  is  slightly 
higher  than  the  average  rate  in  Ohio,  but  the  security 
is  regarded  as  the  best  in  the  state,  because  Ohio  is  pri- 
marily an  agricultural  state.    This  method  of  financing  her 


Regular  Mortgage  Loans  to  Farmers  213 

farmers  through  the  building  and  loan  associations  not 
only  decreases  the  need  for  cooperative  farm  mortgage 
associations,  but  also  to  a  large  extent  makes  direct  state 
loans  to  farmers  unnecessary. 

FARM  LOANS  BY  INSURANCE   COMPANIES 

Of  the  life  insurance  companies  doing  business  in 
the  United  States,  from  75  to  80  per  cent  of  them  now 
lend  part  of  their  funds  on  farm  mortgages.  Data  gath- 
ered in  1913  by  the  Rural  Organization  Service  of  the 
United  States  Department  of  Agriculture  show  a  total  of 
$414,000,000  invested  by  fifteen  of  the  largest  insurance 
companies.  These  loans  are  placed  largely  in  what  is 
known  as  the  "corn  belt"  states,  six  of  which,  namely, 
Minnesota,  Iowa,  Nebraska,  Kansas,  North  Dakota  and 
South  Dakota,  have  absorbed  three-fourths  of  the  insur- 
ance loans  on  farm  mortgages. 

A  striking  feature  of  these  loans  from  insurance  com- 
panies is  that  they  carry  fairly  low  rates  of  interest,  being 
restricted  largely  to  the  sections  of  those  agricultural 
states  where  the  average  rates  of  interest  are  low.  Another 
important  fact  is  that  31  per  cent  of  all  insurance  loans 
on  farm  mortgages  are  placed  in  Iowa  alone,  where  the 
average  rate  of  interest  is  only  5.6  per  cent.  Very  little 
of  this  insurance  money  is  placed  on  farms  south  of  the 
Ohio  River  and  east  of  the  Mississippi  River. 

The  chief  method  of  placing  these  loans  is  through 
agencies  which  submit  to  an  insurance  company  the  appli- 
cation for  a  proposed  loan.  If  the  loan  is  approved,  it  is 
made  out  directly  to  the  insurance  company  from  the 
borrower.    The  company's  agent  is  usually  known  as  a 


214  Principles  of  Rural  Credits 

local  correspondent,  oftentimes  being  selected  from  a 
local  bank  or  real-estate  firm.  However,  before  such 
agents  are  selected  to  submit  applications  for  loans,  the 
territory  itself  is  first  inspected  by  the  insurance  company. 
If  it  deems  the  field  suitable  for  loaning  purposes,  it  pro- 
ceeds to  determine  from  time  to  time  the  conditions  under 
which  it  will  accept  farm  paper,  and  then  the  company 
determines  the  choice  of  some  correspondent  from  whom 
it  receives  applications  for  loans.  Such  a  correspondent 
acts  as  the  agent  of  the  borrower  and  not  of  the  lending 
insurance  company. 

When  applications  are  turned  in,  the  acceptance  of 
loans  is  generally  conditioned,  namely,  it  is  customary 
for  insurance  companies  to  demand  a  year's  time  within 
which  to  make  an  examination  of  the  property  in  question 
through  their  own  official  inspector.  If,  from  the  findings 
of  such  an  inspection,  the  insurance  company  concludes 
that  the  loan  is  unsatisfactory,  the  local  correspondent 
is  expected  to  take  over  the  loan  at  par.  That  is,  the 
insurance  company  does  not  shoulder  the  risk;  it  is  local- 
ized with  the  agent. 

In  a  number  of  instances,  regular  contracts  in  making 
loans  are  made  out  between  the  insurance  company  and 
the  local  agency  serving  as  an  intermediary  between  the 
company  and  the  farmer.  One  company  which  makes 
no  regular  contracts  takes  bonds  from  the  local  agencies 
for  the  faithful  performance  of  their  duties.  When  no 
contract  or  bond  is  used,  it  is  customary  to  make  an 
arrangement  whereby  an  insurance  company  may  return 
the  loan  at  any  time  within  a  year  if,  on  inspection,  the 
loan  is  found  undesirable. 


Regular  Mortgage  Loans  to  Farmers  215 

As  to  the  length  of  time  farm  mortgages  run,  the  returns 
from  various  insurance  companies  show  that  the  usual 
period  is  for  five  years,  but  in  some  instances  they  run 
from  seven  to  ten  years.  This  period  for  loans  seems 
to  have  remained  unchanged  for  a  number  of  years.  In 
some  cases,  insurance  companies  prefer  to  loan  for  ten 
years  rather  than  five  years;  but  the  shorter  period  is 
preferred  by  local  correspondents  because  it  enables  them 
to  carry  on  a  more  profitable  business. 

As  to  the  right  of  prepayment,  the  usual  custom  by 
insurance  companies  is  to  give  the  farmer  the  right  to  pay 
off  any  part  of  the  principal  on  any  interest  date.  These 
payments  are  to  be  made  in  even  hundreds  of  dollars. 
This  right  of  prepayment  is  a  privilege  usually  granted 
at  the  making  of  the  loan.  But  it  has  an  effect  on  the 
rate  of  interest;  that  is,  some  agencies  grant  a  lower  interest 
rate  but  will  not  allow  the  right  of  prepayment.  In  some 
instances,  however,  the  borrower  insists  on  the  right  of 
prepayment,  and  the  agent  is  constrained  to  grant  it 
under  these  circumstances. 

As  a  rule,  insurance  companies  prefer  to  renew  loans 
because  this  involves  less  expense  than  arranging  for  new 
loans.  In  any  case  they  take  very  little  risk,  for  land 
values  are  generally  rising  so  that  the  security  for  the 
loan  is  constantly  improving. 

The  rate  of  interest  on  loans  varies  from  time  to  time 
in  the  same  locality,  and  especially  so  in  the  different  states. 
The  usual  rate  of  interest  is  5J/2  per  cent  in  the  corn  belt. 
However,  in  the  last  few  years  the  rate  has  been  slowly 
rising.  Where  the  rate  was  5  per  cent  two  or  three  years 
ago,  it  is  now  5J/2  per  cent.    In  some  states  the  rate  has 


216  Principles  of  Rural  Credits 

risen  from  5J/£  to  6  per  cent.  In  Mississippi,  Oklahoma, 
Texas  and  a  few  other  states,  the  insurance  companies 
receive  as  high  as  6  or  63^  per  cent  interest  on  farm- 
mortgage  loans. 

While  the  above  rates  apply  to  loans  made  by  insurance 
companies,  the  amount  paid  by  borrowers  includes  a 
number  of  items  which  raise  the  rate  considerably.  Where 
a  local  correspondent  or  agent  deals  directly  with  an 
insurance  company,  only  one  commission  is  added.  If, 
however,  the  local  agent  or  some  other  firm,  such  as  a 
mortgage  company,  makes  a  loan  before  it  passes  to  the 
insurance  company,  two  commissions  are  added. 

There  is  some  variation  in  the  practice  of  charging 
commissions.  As  a  rule,  the  commission  is  higher  in  those 
states  where  interest  rates  are  higher.  Sometimes  the 
commission  is  a  certain  rate  on  the  total  amount  of  the 
loan.  This  is  charged  in  advance  and  seems  to  vary  from 
2  to  5  per  cent.  At  other  times  it  may  be  a  lower  rate  but 
apportioned  so  as  to  be  collected  each  year  with  the  inter- 
est, in  which  case  the  commission  varies  from  1  to  V/2 
per  cent. 

When  a  farm-mortgage  loan  passes  through  the  hands 
of  both  a  local  agent  and  a  loan  company  before  it  reaches 
an  insurance  company,  the  necessary  steps  and  expenses 
may  be  learned  from  the  following  description: 

The  farmer  applies  to  the  local  agent  who  sends  the 
application  to  the  loan  company;  the  latter  sends  its 
examiner  to  look  over  the  farm  property.  If  found  sat- 
isfactory and  the  loan  company  makes  the  loan,  it  has 
to  divide  its  commission  with  the  agent  who  sent  in  the 
application.    Out  of  its  own  share  the  loan  company  has 


Regular  Mortgage  Loans  to  Farmers         217 

to  pay  all  its  business  expenses  which  may  be  summed  up 
as  to  any  individual  loan  as  follows: 

(1)  Commission  to  the  local  agent,  an  expense  in  a 
measure  determined  by  competitive  conditions. 

(2)  Time  and  traveling  expenses  of  the  examiner.  If 
the  farm  is  at  any  distance,  the  traveling  expenses  would 
easily  amount  to  $10  and  the  value  of  the  time  not  less 
than  $5. 

(3)  Examination  of  the  abstract  of  title  and  any  efforts 
to  straighten  title,  both  of  which  may  involve  considerable 
time. 

(4)  Drawing  and  executing  papers. 

(5)  Placing  the  loan  with  an  insurance  company. 

(6)  Collection  of  interest,  taxes  and  possibly  the  insur- 
ance also  during  the  term  of  the  loan. 

(7)  Remittance  of  collections  to  owner  of  loan  with  all 
necessary  correspondence. 

The  most  general  objection  raised  by  insurance  com- 
panies against  investment  in  farm  mortgages  is  that  they 
are  not  a  liquid  asset.  This  difficulty,  of  course,  is  re- 
moved by  means  of  mortgage  bonds,  but  insurance  com- 
panies have  not  adopted  this  method  of  making  farm- 
mortgage  loans  more  readily  sold  on  the  money  market  in 
times  of  financial  stringency.  Under  the  present  system, 
it  would  probably  be  impossible  in  times  of  stress  to  sell 
a  farm  mortgage  or  to  realize  any  money  on  it.  Another 
objection  to  farm  mortgages  is  that  the  clerical  and  super- 
visory work  connected  with  them  is  held  to  be  larger  than 
that  connected  with  any  other  form  of  investment. 

With  city  bonds  or  railroad  bonds,  it  is  possible  by 
market  quotations  to  find  what  the  strength  of  the  security 


218  Principles  of  Rural  Credits 

is,  but  the  only  way  to  find  out  the  strength  of  a  farm- 
loan  security  is  to  visit  the  farm.  Most  insurance  com- 
panies have  to  trust  to  persons  not  directly  in  their  employ 
to  do  this  or  to  do  it  themselves.  This  frequently  means 
that  the  head  of  an  insurance  company  or  its  financial 
secretary  has  to  take  a  trip  every  year  or  so  in  order  to 
keep  in  touch  with  the  essential  features  of  the  situation 
and  with  the  parties  through  whom  the  insurance  com- 
panies make  loans. 

While  insurance  companies  emphasize  the  above  objec- 
tions to  farm  loans,  there  are  certain  factors  which  seem 
to  make  farm  mortgages  especially  desirable  as  an  invest- 
ment. As  compared  with  city  loans,  their  value  is  said 
to  fluctuate  less.  One  insurance  company,  after  a  long 
experience  involving  the  investment  of  $65,000,000  in 
farm  mortgages  without  any  losses,  made  the  statement 
that  there  is  no  security  so  fixed  or  so  firm  for  a  trust-fund 
investment  as  cultivated  soil.  At  the  same  time  it  adds 
that  care  must  be  exercised  in  selecting  the  territory  and 
also  the  correspondent,  agent  or  local  examiner.  Also 
constant  attention  must  be  given  to  shifting  conditions 
within  a  given  territory  so  as  to  fix  with  judgment  the 
amounts  to  be  loaned  to  the  acre,  the  rate  of  interest  to  be 
secured,  and  the  best  method  of  repaying  the  loan. 

While  nothing  can  be  said  in  objection  to  the  rates 
of  interest  charged  farmers  by  insurance  companies  for 
mortgage  loans,  the  commissions  and  other  incidental  costs 
for  contracting  these  loans,  the  comparatively  short  time 
that  the  larger  part  of  them  run,  and  the  quite  large  ex- 
pense connected  with  the  renewal  of  these  loans  make  it  a 
very  costly  system  for  the  average  American  farmer. 


Regular  Mortgage  Loans  to  Farmers  219 

There  is  great  room  for  improvement  in  these  directions 
without  in  the  least  interfering  with  legitimate  legal 
interest  for  invested  funds.  It  cannot  be  said  that  farmers 
are  well  financed  by  being  granted  loans  on  first  mortgage 
by  insurance  companies.  The  incidental  costs  for  con- 
tracting a  loan  increase  the  annual  charges  on  farm  mort- 
gages anywhere  from  13^  to  5  per  cent.  If,  however,  these 
extra  costs  could  be  saved  to  the  farmer,  then  the  invest- 
ment of  insurance  funds  in  farm  mortgages  would  be  a 
great  advantage  to  the  farmer  and  of  material  benefit  to 
agriculture. 

Under  any  system  of  regular  mortgage  loans  now  prac- 
ticed in  the  United  States,  the  extra  costs  to  the  farmer 
are  what  add  enormously  to  the  legal  rates  of  interest. 
Relief  from  these  high  incidental  costs  could  be  secured 
either  by  enlarging  the  amount  of  state  funds  for  the  pur- 
pose of  making  mortgage  loans  to  farmers,  as  is  now  done 
in  many  states,  or  by  the  establishment  of  a  land  bank  in 
each  state  to  deal  exclusively  with  the  subject  of  the  issue, 
sale  and  redemption  of  farm-mortgage  bonds.  In  either 
case,  the  problem  of  financing  the  landowning  farmer 
would  be  pressing  rapidly  forward  toward  the  point  of 
solution. 

The  meritorious  agencies  in  operation  in  the  United 
States  for  advancing  mortgage  credit  to  farmers  should 
be  increased,  although  their  methods  of  business  could  be 
greatly  improved.  In  that  case  the  farmers  themselves 
would  be  the  last  ones  to  complain,  nor  would  they  request 
any  long-time  credit  system  that  would  be  tinged  in  the 
least  with  governmental  paternalism.  The  American 
farmer  has  never  hesitated  to  meet  his  just  obligations 


220  Principles  of  Rural  Credits 

and  all  he  asks  is  fair  treatment  along  credit  lines  in  the 
economic  work  of  the  world.  Under  the  present  burden- 
some credit  system  he  cannot  do  his  work  as  efficiently 
as  he  would  wish.  Since  this  is  a  matter  which  directly 
concerns  the  welfare  of  the  state,  there  is  no  problem 
to-day  so  important  as  the  adoption  of  a  better  credit 
system  for  landowning  farmers.  No  state,  therefore, 
which  has  its  own  welfare  at  heart  can  do  a  wiser  thing 
than  to  give  careful  consideration  to  the  problem  of 
financing  its  farmers  and  thereby  promote  the  advance  of 
agriculture. 


CHAPTER  XV 
FINANCING  THE  TENANT  FARMER 

While  the  foregoing  pages  have  dealt  almost  exclu- 
sively with  rural  credits  for  landowners,  probably  the  most 
difficult  phase  of  the  whole  rural  credit  problem  is  that 
connected  with  farm  tenancy.  How  shall  the  farm  tenant 
be  financed?  Or  is  this  a  phase  of  the  subject  which  had 
better  be  left  alone?  The  growth  of  farm  tenancy  is 
recognized  as  developing  a  serious  agricultural  problem 
in  the  United  States;  it  is  evident,  therefore,  that  the 
financial  side  of  the  problem  is  no  less  important.  For 
this  reason  alone,  the  question  of  financing  the  tenant 
farmer  calls  for  a  brief  consideration  at  least. 

A  farm  tenant  is  understood  to  mean  a  farmer  who 
cultivates  rented  land  only.  According  to  the  Thirteenth 
Census  of  1910,  there  were  no  less  than  2,354,676  farm 
tenants  in  the  United  States  divided  into  three  classes, 
namely:  (1)  Share  tenants,  or  those  who  pay  one-half, 
one-third,  one-fourth,  or  some  definite  share  of  the  prod- 
ucts of  the  farm  as  rent;  (2)  share-cash  tenants,  or  those 
who  pay  a  share  of  the  products  for  part  of  the  land  they 
rent  and  cash  for  a  part  of  the  land;  and  (3)  cash  tenants, 
or  those  who  pay  a  cash  rental  or  a  stated  amount  of  labor 
or  products  per  acre.  The  rate  of  increase  in  the  number 
of  these  classes  of  farm  tenants  taken  together  was  16.3 
per  cent  from  1900  to  1910  as  compared  with  an  increase 

221 


222  Principles  of  Rural  Credits 

of  farm  owners  of  8.1  per  cent.  At  this  rate,  farm  tenants 
are  increasing  about  twice  as  fast  as  farm  owners.  The 
question  of  financing  this  large  and  growing  body  of 
farmers,  therefore,  cannot  well  be  disregarded  at  the 
present  time. 

A  MATTER  OF  PERSONAL  CREDIT 

By  the  nature  of  farm  tenancy,  there  is  no  problem 
relating  to  long-time  or  land-mortgage  credit.  Farm 
tenants  are  not  landowners,  consequently  they  have  no 
land  to  offer  as  security  for  mortgage  loans.  Some  farm 
tenants,  however,  may  own  chattels  of  various  kinds  on 
which  a  chattel  mortgage  could  be  given  for  a  loan.  But 
this  class  of  loans  is  regarded  as  personal  or  short-time 
loans,  the  chattel  security  taking  the  place  of  personal 
indorsement  on  notes. 

The  tenant  farmer  also  makes  no  investment  in  farm 
improvements,  so  that  another  important  factor  which 
usually  enters  into  farm-mortgage  loans  is  lacking  in  this 
case  as  well.  This  limits  the  subject,  therefore,  to  a  con- 
sideration of  plans  for  financing  the  large  number  of  tenant 
farmers  in  the  United  States  with  personal  credit. 

But  does  the  tenant  farmer  need  credit?  In  all  probabil- 
ity he  needs  it  more  than  do  farm  owners.  The  basis  of 
credit  as  a  rule  is  some  kind  of  property  security,  and  only 
in  rare  instances  is  a  loan  made  on  a  person's  signature 
irrespective  of  whether  the  indorser  can  or  cannot  repay 
the  loan  at  the  time  of  maturity  should  the  real  maker  of 
the  note  fail  to  do  so.  The  very  purpose  of  an  indorser 
on  a  note  is  to  secure  an  otherwise  doubtful  signature  for 
the  redemption  of  a  loan. 


Financing  the  Tenant  Farmer  223 

When  a  person  owns  unincumbered  property,  there  is 
little  difficulty  in  his  being  granted  limited  credit  at  a 
store  or  bank  where  he  is  known.  If  a  resident  in  a  given 
locality  has  a  reputation  for  honesty,  sobriety,  and  busi- 
ness ability,  he  may  also  be  allowed  a  limited  credit  with 
or  without  a  qualified  indorser.  But,  as  a  rule,  the  money 
lender  or  the  storekeeper  requires  some  kind  of  tangible 
security  of  much  greater  value  than  the  amount  of  a  con- 
templated loan,  so  that,  in  case  of  non-payment  of  the 
debt,  the  property  advanced  as  security  may  be  sold  and 
the  debt  realized.  This  is  a  general  business  practice  based 
on  the  principle  of  protecting  the  creditor  from  loss,  and  it 
is  not  open  to  criticism  as  regards  loans  to  tenant  farmers. 

But  credit  is  as  dangerous  as  it  is  useful.  A  farmer  with 
good  credit  may  continue  to  borrow  until  he  becomes 
bankrupt,  simply  because  he  expended  his  borrowed 
funds  for  non-productive  purposes.  When  the  time  comes 
for  repayment,  as  come  it  inevitably  must,  he  may  not 
have  the  money  with  which  to  repay  the  loan  and  the 
security  for  it  has  to  be  sold  to  make  the  loan  good.  If 
the  farmer  had  been  unable  to  borrow,  he  would  under 
these  circumstances  have  been  better  off  financially. 
There  are  undoubtedly  many  farmers  in  the  United  States 
who  are  deeply  in  debt  because  their  credit  has  been  so 
good.  The  fact  is  debt  is  dangerous,  and  no  tenant  farmer 
should  run  in  debt  if  he  can  possibly  avoid  it. 

PARTIES   INTERESTED   IN   TENANT   FARMING 

As  a  means  of  determining  the  best  method  of  financing 
tenant  farmers,  it  is  advisable  to  consider  the  parties  most 
directly  interested  in  farm  tenancy.    There  are  practically 


224  Principles  of  Rural  Credits 

two  parties  only  directly  interested  in  this  form  of  land 
tenure,  namely,  the  landowner  and  the  tenant,  though  the 
general  public  has  a  very  indirect  interest  in  the  matter. 
The  doctrine  of  the  state's  right  to  conserve  its  natural 
resources  makes  every  state  a  party  more  or  less  interested 
in  tenant  farming.  Under  a  crude  system  of  renting  farms 
which  has  prevailed  in  the  United  States  for  many  genera- 
tions, there  has  been  an  enormous  and  rapid  depletion  of 
soil  fertility  in  some  sections  of  the  country,  and  this 
depletion  of  arable  soils  has  long  been  recognized  as  one 
of  the  most  ruinous  policies  that  could  be  perpetuated. 
To  protect  the  soil  for  future  generations  has  become 
a  recognized  duty  of  both  the  landowner  and  the 
state. 

Now,  if  a  tenant  farmer,  because  of  a  lack  of  credit  or 
for  any  other  reason,  fails  to  supply  the  soil  with  sufficient 
fertilizers  of  the  right  kind  or  by  a  ruinous  cropping  system 
depletes  soil  fertility  beyond  a  legitimate  limit  set  by  good 
farming,  the  future  welfare  of  the  state  is  being  as  much 
injured  indirectly  as  the  land  itself  is  being  injured  directly. 
In  the  long  run  it  would  undoubtedly  be  to  the  best  interest 
of  the  state,  since  it  cannot  very  well  provide  a  credit 
system  for  tenant  farmers  without  violating  sound  busi- 
ness principles,  to  provide  an  educational  system  which 
would  teach  both  landowner  and  tenant  the  utter  folly 
of  any  such  policy  as  the  depletion  of  soil  fertility. 

As  just  stated,  it  is  difficult  to  see  how  a  state  govern- 
ment can  provide  credit  for  a  large  body  of  landless  farmers 
without  violating  the  principles  of  bothbusiness  and  finance. 
The  state,  through  some  designated  official,  might  be  able 
to  advise  as  to  the  best  course  to  pursue  in  renting  farms 


Financing  the  Tenant  Farmer  225 

so  as  to  protect  the  interests  of  all  parties  concerned;  but 
when  it  comes  to  direct  aid  by  furnishing  credit  to  a  class 
more  or  less  without  adequate  security,  it  would  probably 
do  more  harm  than  good  and  would  be  going  beyond  its 
legitimate  functions.  Under  certain  circumstances,  it 
would  be  far  wiser  to  discourage  the  use  of  credit  than  to 
grant  it;  for  indiscriminate  credit  might  turn  out  to  be  as 
ruinous  to  a  tenant  as  to  a  landowner. 

To-day  the  average  farmer  needs  to  be  instructed  as 
much  against  the  unwise  use  of  credit  as  in  its  proper  use. 
This  is  a  matter  of  education  the  principles  of  which  have 
been  much  neglected  in  rural  school  educational  systems. 
In  this  matter  the  state  can  play  a  very  important  part 
in  the  farm  tenancy  problem, — an  enlightened  part  which 
in  the  end  will  work  for  the  good  of  the  landowner,  the 
tenant,  and  the  general  public.  The  state  has  already 
assumed  the  task  of  popular  education.  The  next  step 
is  to  broaden  the  scope  of  its  work  in  order  to  strengthen 
the  weak  points  which  have  a  more  or  less  direct  bearing 
on  the  economic  and  social  development  of  the  rural 
population. 

THE  LANDOWNER  AS  THE  TENANT'S  CREDITOR 

With  the  state  eliminated  as  a  proper  source  of  credit 
supply  for  farm  tenants,  the  problem  practically  resolves 
itself  into  the  relations  which  exist  between  the  landowner 
and  the  tenant.  Farm  tenancy,  as  has  been  pointed  out, 
involves  some  form  of  crop-sharing.  The  greater  the 
yield  of  crops,  the  greater  the  share  for  both  parties.  It  is 
to  the  interest  of  both  to  get  good  returns,  but  it  is  not 
to  the  interest  of  the  landowner  to  get  good  returns  for  a 


226  Principles  of  Rural  Credits 

few  years  at  the  expense  of  his  soil  which  is  the  most 
important  asset  of  the  farmer. 

But,  in  addition  to  the  land,  it  is  not  unusual  for  the 
landowner  to  supply  the  tenant  with  all  the  necessary 
working  capital  for  running  a  farm,  such  as  live  stock, 
machinery,  implements,  and  so  on ;  in  fact,  it  may  be  said 
that  this  practice  is  quite  general. 

The  tenant,  however,  has  frequently  to  provide  the 
whole  or  part  of  the  fertilizers  to  be  used,  with  no  provi- 
sion stipulated  as  to  the  kind,  amount  and  quality.  This, 
of  course,  relates  directly  to  the  land  itself  which  is  the 
fundamental  form  of  capital  in  farming.  If  a  landowner 
neglects  to  provide  for  the  proper  care  and  maintenance 
of  his  soil  fertility  when  he  rents  a  farm  to  a  tenant,  and 
if  the  tenant  is  so  short-sighted  as  to  think  that  it  is  to 
his  best  interest  to  make  all  he  can  out  of  the  soil  without 
putting  anything  into  it, — both  parties  have  contracted 
to  ruin  their  prospects  with  the  ruin  of  the  soil  which  is 
bound  to  follow  and  that  very  quickly.  It  is  only  a  ques- 
tion of  a  few  years  when  the  soil  will  be  so  worn  out  that 
the  yield  of  crops  will  not  compensate  the  tenant  for  the 
amount  of  labor  it  has  cost  to  raise  them,  nor  will  the 
landlord  receive  sufficient  from  his  share  of  crops  to  pay 
interest  on  his  invested  capital.  And  this  is  one  of  the 
great  dangers  of  our  present  farm-tenancy  credit  system. 

These  remarks  show  plainly  that  the  farm  owner  is  the 
natural  source  of  credit  for  the  tenant  farmer.  This  applies 
not  only  to  the  need  of  providing  the  capital  for  proper 
farming,  but  also  for  lending  the  tenant  any  money  re- 
quired for  the  purchase  of  the  necessary  supplies  to  main- 
tain the  fertility  of  the  soil.    The  latter,  however,  requires 


Financing  the  Tenant  Farmer  227 

a  system  of  crop  rotation  and  green  manuring  which  is  far 
more  important  than  the  furnishing  of  money  credit  to 
the  tenant.  Unless  the  tenant  is  sufficiently  educated  in 
agricultural  science  to  know  how  to  get  the  most  out  of 
the  land  while  maintaining  or  even  increasing  soil  fertility, 
the  farmer  had  better  undertake  to  provide  the  credit  by 
furnishing  the  necessary  fertilizers  and  by  controlling 
the  cropping  system.  While  this  may  seem  like  taking 
the  initiative  out  of  the  hands  of  the  tenant,  it  is  to  the 
best  interest  of  both  parties  and  of  future  generations 
that  this  should  be  done.  It  is  practically  the  only  safe- 
guard against  a  ruinous  system  which  finds  expression 
in  the  short  lease  and  an  itinerant  farm-tenancy  class. 
Neither  works  for  the  economic  or  social  stability  of  farm 
communities,  and  without  this  stability  progress  in  rural 
life  is  well-nigh  impossible. 

So  long  as  farm  conditions  in  the  United  States  do  not 
permit  of  the  ready  formation  of  rural  credit  societies  of 
the  Raiffeisen  type  as  a  means  of  supplying  credit  and 
supplies  to  farm  tenants,  the  problem  of  financing  the 
tenant  farmer  seems  to  rest  primarily  with  the  landowner. 
In  this  respect  Italy,  perhaps,  furnishes  the  best  illustra- 
tion of  both  systems  working  in  different  parts  of  the 
country  under  different  rural  conditions.  These  systems 
have  been  outlined  in  the  chapter  on  "Personal  Credit  for 
the  Landless  Farmer."  Briefly,  in  those  parts  of  Italy 
where  farms  are  small  and  the  rural  population  is  densely 
settled  and  largely  of  the  tenant  class,  the  Wollemborg 
rural  credit  banks,  which  are  organized  and  conducted 
on  Raiffeisen  principles,  admit  tenant  farmers  to  member- 
ship in  great  numbers,  sometimes  outnumbering  the  land- 


228  Principles  of  Rural  Credits 

owning  farmers  three  to  one.  In  these  densely-settled 
agricultural  districts  the  tenant  farmers  are  financed 
with  short-time  loans  on  the  basis  of  their  personal 
character. 

But  in  other  parts  of  Italy  where  the  system  of  latifundia 
or  large  estates  prevails  and  where  the  rural  population 
is  not  very  numerous,  an  entirely  different  plan  has  been 
worked  out  which  is  more  or  less  comparable  to  American 
farming  conditions  so  far  as  the  size  of  farms  is  concerned. 
In  Tuscany,  for  example,  many  large  estates  are  divided 
up  by  the  owners  into  farms  ranging  from  IY2  to  50  acres 
in  size,  and  on  each  of  these  farms  is  placed  a  farmer's 
family  large  enough  to  do  the  farm  work.  The  financing 
of  these  tenant  farmers  by  the  landowner  includes  the 
following: 

(1)  A  house  for  the  tenant's  family. 

(2)  All  farming  capital  consisting  of  live  stock  and 
stables,  feed  for  the  working  stock,  and  implements. 

(3)  Half  the  costs  of  seeds,  fertilizers,  and  feed  for 
fattening  market  cattle.  If  the  tenant  has  no  money,  the 
landowner  either  purchases  all  the  supplies  or  lends  the 
tenant  the  required  amount  of  money  without  interest. 

(4)  In  cases  of  partial  crop  failure,  if  the  tenant's  share 
is  not  sufficient  to  cover  his  year's  expenses,  the  land- 
owner advances  enough  money  to  the  tenant  to  keep  him 
on  the  farm.  No  interest  is  charged  for  the  loan  which  is 
repaid  in  more  profitable  years. 

(5)  In  case  of  the  illness  or  death  of  a  tenant  so  that 
farm  labor  has  to  be  hired,  the  landowner  pays  for  this 
labor  to  help  the  tenant. 

(6)  The  lease  provides  for  the  rotation  of  crops  which 


Financing  the  Tenant  Farmer  229 

thereby  gives  the  landowner  a  supervision  over  the  tenant's 
system  of  farming. 

(7)  The  crops  or  the  profits  from  fattening  cattle  are 
divided  equally  at  the  end  of  the  season. 

The  net  results  of  this  plan  of  financing  tenant  farmers 
are  permanence  of  tenant  occupancy  of  farms,  the  gradual 
accumulation  of  a  surplus  by  the  tenant,  and  a  copartner- 
ship interest  by  landowner  and  tenant  in  soil  conservation. 
Practically  no  other  need  of  credit  is  felt  by  tenants  who 
operate  farms  under  such  a  practical  and  intelligent  sys- 
tem as  is  carried  out  on  many  large  estates  in  Italy. 

THE  FUNCTIONS  OF  LANDLORD  AND  TENANT 

There  is  every  reason  for  landowners  who  rent  out  their 
land  to  take  into  consideration  the  economic  principles  of 
farm  tenancy.  No  more  natural  illustration  of  copartner- 
ship is  possible  than  the  mutual  relations  of  landlord  and 
tenant  in  agriculture.  In  such  a  case,  the  whole  or  part  of 
the  produce  from  the  use  of  land,  labor  and  capital  is  to 
be  divided  according  to  agreement.  The  main  function 
of  the  landlord  is  to  provide  the  means  of  production, 
and  of  the  tenant  to  provide  the  labor  of  production. 
The  mutuality  is  self-evident  and  the  duty  of  each  is 
perfectly  plain. 

A  landlord  would  be  grossly  careless  in  guarding  his 
own  interests  if  he  failed  to  demand  of  the  tenant  a  proper 
use  of  the  instruments  of  production,  be  these  instruments 
land,  implements,  working  stock,  or  other  form  of  capital. 
And  the  tenant  who  has  no  regard  for  his  obligations  to 
his  landlord,  who  has  placed  at  his  disposal  the  means  of 
earning  a  living,  is  not  worthy  of  being  a  farm  tenant. 


230  Principles  of  Rural  Credits 

If  the  landlord  performed  the  labor  himself,  he  would 
provide  all  the  factors  of  production  and  would  be  respon- 
sible for  their  proper  use.  But  if  the  landlord  grants  to 
another,  on  the  basis  of  a  share  of  the  produce,  the  privilege 
of  supplying  the  labor  factor  of  production,  he  has  elim- 
inated no  element  of  responsibility  as  to  the  use  or  misuse 
of  capital.  It  is  still  the  landlord's  capital  and  it  is  plainly 
his  duty  to  look  after  it.  Consequently,  the  landowning 
farmer  who  rents  his  farm  to  another  owes  it  to  himself  to 
supervise  the  use  of  his  property  as  if  he  himself  were 
performing  the  labor  of  production. 

From  the  economic  point  of  view,  the  problem  of  finan- 
cing the  large  number  of  tenant  farmers  in  the  United 
States  offers  no  difficulty  whatever.  It  is  one  of  the  sim- 
plest forms  of  cooperative  enterprises  possible.  The 
obligations  are  purely  mutual  as  the  benefits  are  mutual. 
The  credit  desired  by  the  tenant  is  personal  or  short-time 
credit  for  productive  purposes,  and  the  only  natural  party 
to  supply  that  credit  is  the  other  member  of  the  mutual 
society — the  landlord.  He  is  the  best  judge  as  to  the 
prospects  of  the  tenant  being  able  to  repay  his  loan  at  the 
appointed  time.  The  security  for  the  credit  is  on  the  land- 
lord's property  at  crop-sharing  time.  Every  element 
for  making  and  securing  a  loan  on  a  short-time  basis  is 
contained  in  the  relations  which  exist  between  landlord 
and  tenant,  and  no  other  party  could  undertake  to  finance 
the  tenant  farmer  without  running  the  risk  of  loss. 

With  the  credit  relations  between  landlord  and  tenant 
properly  understood  and  carried  out,  tenant  farming 
would  no  longer  be  ruinous  to  soil  fertility.  The  short 
lease,  itinerant  farm  tenants,  and  other  unstable  features 


Financing  the  Tenant  Farmer  231 

connected  with  farm  tenancy  would  cease.  The  tenant 
would  take  his  place  beside  the  landowner  in  planning  and 
carrying  out  the  work  of  the  farm  to  the  mutual  advantage 
of  both.  Herein  lies  the  secret  not  only  for  financing  the 
large  number  of  tenant  farmers  in  the  United  States,  but 
of  building  up  a  more  profitable  agriculture  for  the  future. 
Such  a  method  of  furnishing  credit  to  farm  tenants 
cannot  be  undertaken  any  too  quickly  for  the  financial 
benefit  of  both  landlord  and  tenant  and  for  the  agricul- 
tural welfare  of  the  whole  country. 


CHAPTER  XVI 

THE    NATIONAL    GOVERNMENT   AND    RURAL 

CREDITS 

With  a  lack  of  organization  among  farmers  in  the  United 
States,  the  question  as  to  what  part  the  national  govern- 
ment can  take  in  promoting  rural  credits  is  not  easy  to 
answer. 

From  a  governmental  point  of  view,  the  subject  is 
comparatively  new.  Before  the  last  great  national  po- 
litical conventions  occurred  in  the  summer  of  1912, 
practically  no  serious  consideration  had  been  given  by 
the  government  to  the  subject  of  rural  credits.  Certain 
investigations,  however,  made  by  the  Department  of 
State  through  United  States  ambassadors  brought  to  the 
attention  of  the  American  people  the  methods  of  financing 
farmers'  organizations  in  various  European  countries. 

Because  of  these  reports  on  the  subject  issued  by  the 
Department  of  State,  each  of  the  three  great  political 
parties,  in  formulating  their  platforms  for  presentation  to 
the  voters,  had  inserted  a  plank  pledging  the  party  to 
rural  credits  legislation. 

The  governors  of  the  states,  at  their  meeting  in  1912, 
discussed  the  question  of  rural  credits  and  appointed  a 
committee  of  nine  members  to  report  on  the  subject  at 
their  next  annual  meeting. 

In  1913  the  United  States  and  the  American  commis- 

232 


The  National  Government  and  Rural  Credits    233 

sions  made  a  detailed  study  of  agricultural  organization 
and  rural  credits  in  Europe,  and  these  commissions  made 
an  elaborate  report  to  Congress  on  both  these  subjects. 

Finally,  no  less  than  six  bills  relating  to  the  organization 
of  some  form  of  rural  credit  have  been  introduced  into 
Congress  during  the  sessions  of  1913-15.  These  bills  were 
referred  to  the  subcommittee  on  Rural  Credits  of  the 
Committee  on  Banking  and  Currency,  but  only  one  of  the 
introduced  bills — namely,  the  Bulkley  bill — was  reported 
to  the  full  committee.  The  Committee  on  Banking  and 
Currency,  however,  has  taken  no  action  on  the  subject, 
presumably  because  of  the  pressure  of  other  very  important 
legislative  business  or  because  the  members  recognize 
the  difficulties  connected  with  rural  credit  legislation  from 
a  national  point  of  view. 

THE   BASIS   OF  SOUND   RURAL   CREDIT 

If  European  experience,  covering  more  than  half  a 
century  of  cooperative  personal  credit  and  more  than  a 
century  of  cooperative  mortgage  credit,  has  any  lessons 
at  all  for  American  farmers,  the  most  important  are: — 

(1)  That  organization  among  farmers  has  been  the  basis 
of  success  in  their  credit  systems; 

(2)  That  education  in  the  use  of  credit  has  proceeded 
hand  in  hand  with  organization;  and 

(3)  That  personal  supervision  by  the  farmers  them- 
selves over  their  organizations  and  over  the  use  of  loans, 
made  only  for  productive  purposes,  has  been  a  prominent 
factor  in  the  European  system. 

In  no  instance  has  any  government  taken  the  initiative 
in  establishing  a  rural  credit  system.     When  legislation 


234  Principles  of  Rural  Credits 

by  any  national  government  has  taken  place,  it  has  usually 
been  for  the  purpose  of  facilitating  or  aiding  the  organiza- 
tion of  farmers'  cooperative  societies;  and  when  govern- 
ment aid  has  been  granted,  it  has  generally  taken  the  form 
of  loans  at  low  rates  of  interest  made  to  local  credit  so- 
cieties through  central  or  regional  credit  banks.  For  a 
government  to  take  the  initiative  in  establishing,  for 
example,  a  long-time  mortgage  credit  system  would  seem 
to  European  farmers  like  trying  to  make  a  pyramid  stand 
on  its  apex. 

Perhaps,  therefore,  the  Committee  on  Banking  and  Cur- 
rency has  taken  the  wisest  course  in  not  reporting  any  rural 
credit  bill  at  the  present  time.  The  committee  has  held 
numerous  meetings  and  heard  a  large  number  of  witnesses 
on  the  subject  of  rural  credits.  The  subject-matter,  as 
understood  by  these  different  witnesses  from  many  walks 
of  life,  including  both  rural  and  urban,  has  been  presented 
and  printed  in  all  its  aspects.  Notwithstanding  all  this  tes- 
timony, both  of  European  farmers  and  of  our  own  people, 
relating  to  rural  credits,  the  wisdom  of  the  government 
taking  any  action  at  the  present  time  is  evidently  open  to 
serious  question  by  the  congressional  committee  which 
has  the  matter  in  charge.  As  already  pointed  out  in  these 
pages,  there  are  many  steps  to  be  taken  by  removing  the 
illegal  burdens  which  now  afflict  our  farmers,  all  of  which 
are  preliminary  to  laying  a  sound  foundation  for  an  Ameri- 
can rural  credit  system. 

Now,  when  all  things  are  taken  into  consideration — the 
political  autonomy  of  the  separate  states,  the  practical 
independence  of  American  farmers,  the  large  size  of  farms, 
the  isolated  condition  of  farm  life,  and  the  many  means  of 


The  National  Government  and  Rural  Credits    235 

credit  which  landowning  farmers  possess — there  is  nothing 
that  the  national  government  can  do  towards  establishing 
a  sound  rural  credit  system  that  the  individual  states  can- 
not do  much  better.  Every  state  ought  to  encourage 
agriculture  and  protect  the  farmer's  credit  if  it  has  its 
own  welfare  at  heart.  Some  states,  as  Massachusetts 
and  New  York,  have  undertaken  to  promote  rural  credits. 
The  efforts  put  forth  include  legislation,  organization  and 
education — all  essential  factors  in  promoting  a  sound 
rural  credit  system;  but  the  movement  is  too  new  as  yet 
to  be  able  to  state  whether  or  not  these  efforts  will  be 
successful.  In  fact,  there  is  little  that  the  states  or  the 
national  government  can  do  in  establishing  rural  credits 
on  a  firm  basis  until  our  farmers  are  better  organized. 

THE    COOPERATIVE   ORGANIZATION   OF   FARMERS 

But  when  it  comes  to  the  cooperative  organization  of 
farmers,  the  question  is  whether  they  shall  organize  them- 
selves or  be  aided  by  the  states  and  by  the  national  govern- 
ment. European  experience  plainly  proves  that  there 
can  be  no  sound  agricultural  credit  system  until  the  farm- 
ers are  better  organized.  It  seems,  therefore,  that  the 
first  step  in  the  solution  of  our  rural  problems  is  for  farm- 
ers to  organize  for  the  protection  and  promotion  of  their 
own  interests.  No  one  else  will  do  it  for  them.  No  one 
knows  the  needs  of  farmers  better  than  they  themselves 
know  them,  and  no  organization  is  better  able  to  look 
after  the  interests  of  farmers  than  a  real  farmers'  organi- 
zation. 

In  the  matter  of  rural  organization,  Europe  vastly  excels 
the  United  States  or  Canada.     There  the  farmers  are 


236  Principles  of  Rural  Credits 

organized  into  small  local  bodies  or  units  which,  by  means 
of  ever-extending  associations  and  federations,  are  finally 
merged  into  great  national  organizations  which  come  more 
or  less  into  direct  touch  with  the  governments.  These 
national  organizations  have  for  their  aims  not  only  a 
guardianship  over  the  farmers'  interests,  but  an  influence 
for  promoting  their  economic,  social  and  political  welfare. 
These  organizations  have  developed  along  three  lines — 
scientific,  practical  and  cooperative.  Each  performs  its 
functions  in  behalf  of  agriculture;  and,  consequently, 
agriculture  and  the  farmer's  uplift  have  made  rapid  prog- 
ress. In  illustration,  there  are  the  Royal  Agricultural 
Society  of  Great  Britain,  the  Georgofili  of  Italy,  the  So- 
ci6te  Nationale  d'Agriculture  de  France,  and  the  Land- 
wirtschafts-Gesellschaft  of  both  Germany  and  Austria — 
these  are  great  national  organizations  which  promote  the 
practical  and  scientific  phases  of  agriculture. 

Then  there  are  the  associations  and  federations  of 
agricultural  cooperative  and  credit  societies  which,  be- 
ginning as  small  local  units,  promote  the  more  satisfactory 
distribution  of  farm  products  throughout  the  nation  and 
extend  different  lines  of  credit  among  millions  of  organ- 
ized farmers.  In  this  way,  organization  and  credit  among 
farmers  have  permeated  great  empires  and  kingdoms.  But 
it  starts  from  the  farmers  and  extends  to  the  government, 
and  does  not  originate  with  the  government  as  is  pro- 
posed by  some  bills  introduced  into  Congress. 

The  relation  of  farmers'  organizations  to  the  govern- 
ment in  Europe  is  best  illustrated  by  the  Landwirtschafts- 
rat,  the  representative  national  organization  of  German 
farmers.    Every  province  in  the  German  Empire  has  its 


The  National  Government  and  Rural  Credits    237 

elected  chamber  of  agriculture,  and  each  of  these  chambers 
sends  one  or  more  delegates  to  a  central  organization — the 
Koniglich  Landwirtschaftsrat,  or  Imperial  Council  of 
Agriculture  at  Berlin.  This  is  an  organized  agricultural 
assembly  representing  the  smallest  rural  units,  the  local 
cooperative  and  credit  societies,  and  extending  to  the  heart 
of  the  German  Empire.  The  provincial  chamber  of 
agriculture  as  part  of  its  functions  seeks  to  ascertain  the 
German  farmer's  economic  and  political  needs  and  to 
recommend  these  needs  to  the  imperial  government.  The 
provincial  chamber  of  agriculture  also  has  the  right  of 
initiative  in  national  legislation  for  the  farmers'  interests, 
and  it  has  the  further  right  of  criticism  of  any  proposed 
or  impending  national  legislation. 

All  these  different  organizations  have  been  the  means 
of  lifting  European  agriculture  out  of  chaos,  of  organizing 
it  on  a  sound  economic  basis,  and  of  promoting  the  wel- 
fare of  the  farmers  themselves.  These  have  been  the 
actual  results  of  organized  effort  among  farmers,  and  they 
plainly  indicate  that  organization  by  farmers  for  farmers 
is  more  needed  in  the  United  States  than  national  rural 
credit  legislation. 

But  there  are  no  such  organizations  of  farmers  in  this 
country.  It  is  true  that  a  few  local  organizations  are 
scattered  here  and  there  which  have  some  particular  pro- 
ducers' interests  to  protect  and  promote,  but  these  organi- 
zations are  not  general  in  the  United  States.  There  are 
a  few  organizations  also  that  are  national  in  name,  but 
their  scope  is  not  broad  enough  to  expect  that  they  will 
soon  be  able  to  guard  the  economic  and  financial  interests 
of  our  farmers.    In  other  words,  there  are  few  real  agencies 


238  Principles  of  Rural  Credits 

at  work  in  this  country  for  promoting  the  organization  of 
farmers. 

THE  DEPARTMENT  OF  AGRICULTURE  AND  THE  FARMER 

With  the  great  need  of  cooperative  and  other  organiza- 
tions among  farmers  for  establishing  rural  credits  on  a 
firm  basis,  the  United  States  Department  of  Agriculture 
seems  to  be  the  one  permanent  national  institution 
which  ought  to  have  the  machinery  for  developing 
agriculture  and  for  organizing  farmers  into  cooperative 
societies. 

But,  evidently,  the  object  of  the  Department  of  Agri- 
culture has  been  the  development  of  technical  and  scien- 
tific agriculture  rather  than  to  promote  cooperation  among 
farmers,  to  formulate  any  system  of  rural  credits,  or  to 
improve  the  conditions  of  marketing  farm  products. 
During  the  sixteen  years  preceding  the  advent  of  the 
Democratic  administration  which  came  into  power  in 
March,  1913,  the  Department  of  Agriculture  grew  rapidly 
and  broadly.  Insignificant  lines  of  governmental  work 
more  or  less  remotely  connected  with  the  land,  or  having 
a  national  bearing,  have  from  time  to  time  been  placed 
under  the  supervision  of  the  Department  and  charged 
against  "  agriculture."  Many  of  these  bureaus  or  divisions 
have  little  or  no  direct  or  indirect  value  to  farmers.  The 
few  lines  of  work  directly  relating  to  agriculture  which 
were  carried  on  were  almost  entirely  devoted  to  increasing 
production;  while  the  broad  and  useful  economic  fields 
of  cooperative  organization,  distribution,  and  rural  credits 
remained  practically  untouched. 

As  a  consequence  of  this  one-sided  development,  the 


The  National  Government  and  Rural  Credits    239 

agricultural  press  began  to  feel  that  the  Department  of 
Agriculture  was  spending  large  sums  of  money  annually 
to  procure  results  or  to  issue  publications  that  were  of 
little  practical  value  to  farmers.  The  agitation  thus 
aroused  finally  attracted  the  attention  of  Congress  to  the 
apparent  need  of  reform  both  in  the  organization  and  work 
of  the  Department  of  Agriculture.  As  a  consequence,  in 
making  the  annual  appropriation  for  the  work  of  the  De- 
partment for  the  year  1914-15,  the  law  specifically  au- 
thorizes and  directs  the  Secretary  of  Agriculture  "to 
prepare  a  plan  for  reorganizing,  redirecting,  and  system- 
atizing the  work  of  the  Department  of  Agriculture  as  the 
interests  of  economical  and  efficient  administration  may 
require." 

The  total  appropriations  for  the  Department's  work  for 
1914-15  amount  to  $19,865,832.  In  all  the  preceding 
years  of  the  Department's  existence,  not  one  dollar  had 
ever  been  appropriated  for  the  study  and  development  of 
cooperation  among  farmers  or  for  the  promotion  of  rural 
credits. 

With  the  advent  of  the  present  administration,  however, 
and  in  view  of  the  agitation  for  better  methods  of  financing 
our  farmers,  the  work  of  rural  organization  has  been  in- 
stituted.   The  Act  provides  as  follows : 

"The  Secretary  of  Agriculture  is  authorized  to  make 
studies  of  cooperation  among  farmers  in  the  United  States 
in  matters  of  rural  credits  and  of  other  forms  of  cooperation 
in  rural  communities;  to  diffuse  among  the  people  of  the 
United  States  useful  information  growing  out  of  these 
studies,  in  order  to  provide  a  basis  for  broader  utilization 
of  results  secured   by   the   research,   experimental  and 


240  Principles  of  Rural  Credits 

demonstration  work  of  the  Department  of  Agriculture, 
agricultural  colleges  and  state  experiment  stations."  An 
appropriation  of  $40,000  was  made  for  this  work  by 
the  national  government  in  behalf  of  agricultural  coopera- 
tion and  rural  credits. 

While,  therefore,  the  sum  of  practically  twenty  million 
dollars  is  spent  by  the  government  through  the  Depart- 
ment of  Agriculture,  a  recent  official  publication  under 
date  of  July,  1914,  makes  the  startling  statement  that  the 
administrative  and  regulatory  functions  of  the  Department 
"now  absorb  nearly  two-thirds  of  the  total  appropria- 
tions." This  is  equivalent  to  saying  that  about  one-third 
of  the  money  appropriated  for  the  Department  of  Agri- 
culture is  all  that  is  expended  in  behalf  of  practical  agri- 
culture. 

In  behalf  of  agricultural  cooperation  and  rural  credits, 
the  sum  of  $40,000  is  only  about  one-fifth  of  one  per  cent 
of  the  total  appropriations.  It  is,  however,  something 
with  which  to  lay  a  foundation  for  rural  organization, 
education  and  finance  which  seems  to  be  essential  to  se- 
curing the  best  results  in  the  future.  The  Act  provides 
for  the  diffusion  of  useful  information  on  these  subjects 
among  the  American  people,  and  education  along  these 
lines  our  farmers  undoubtedly  need.  When  our  farmers 
have  been  organized  into  cooperative  societies  and  have 
been  instructed  in  the  principles  and  the  use  of  credit, 
the  national  government  may  then  by  legislative  action 
facilitate  the  means  of  providing  money  for  financing 
them.  This  could  readily  be  done  by  means  of  state  land- 
bank  loans  to  local  rural  credit  associations,  in  much  the 
same  way  that  the  French  government  has  made  loans 


The  National  Government  and  Rural  Credits    241 

to  the  regional  banks  for  a  similar  purpose.  This  would 
seem  to  be  the  most  natural  and  the  wisest  course  for 
the  national  government  to  pursue  in  its  efforts  to  pro- 
vide better  means  of  financing  farmers  in  the  United 
States. 

Now,  the  Sixty-third  Congress  closed  its  sessions  on 
March  4,  1915,  without  having  passed  any  rural  credits 
legislation.  The  chief  reason  for  not  having  passed  na- 
tional laws  relating  to  personal  and  mortgage  loans  for 
farmers  seems  to  have  been  the  difficulties  of  the  problem 
as  above  outlined  from  a  governmental  point  of  view. 
These  difficulties  made  it  impossible  for  the  congressional 
committees  on  rural  credits  to  unite  on  any  one  of  the 
numerous  bills  that  were  introduced.  Nevertheless,  the 
committees  have  decided  to  continue  to  study  and  to 
hold  hearings  on  the  subject  during  the  recess  of  Con- 
gress, with  a  view  of  drawing  up  and  introducing  a 
satisfactory  bill  at  the  opening  of  the  Sixty-fourth  Con- 
gress. With  what  success  these  efforts  will  be  attended, 
it  is  impossible  at  the  present  time  to  forecast. 


CHAPTER  XVII 

CANADA'S  PROGRESS  IN   COOPERATION  AND 
RURAL  CREDITS 

The  farmer  in  Canada  is  as  much  interested  in  better 
credit  facilities  as  the  farmer  is  in  the  United  States. 
This  fact  is  partly  shown  by  a  sentence  in  Professor 
MichelFs  bulletin  on  "  The  Problem  of  Agricultural  Credit 
in  Canada,"  which  reads  as  follows: 

"Few  questions  in  relation  to  economic  agriculture 
have  attracted  so  much  attention  as  has  the  problem  of 
supplying  loans  and  advances  to  farmers  at  low  rates  of 
interest,  and  no  question  apart  from  the  tariff — which 
is  ever  with  us — is  so  agitating  the  minds  of  the  western 
Canadian  farmer  at  the  present  moment." 

The  farmer  in  Western  Canada,  particularly  in  the 
Province  of  Saskatchewan,  is  very  much  interested  in 
the  subject  of  long-time  or  mortgage  credit  because  more 
than  80  per  cent  of  all  farms  in  the  province  are  mort- 
gaged to  their  utmost  limit.  Moreover,  interest  rates 
there  are  also  very  high,  ranging  from  9  to  15  per  cent. 
But  the  interest  among  farmers  extends  to  most  of  the 
Canadian  provinces.  Delegates  were  sent  from  four 
provinces  to  study  rural  credits  in  Europe  with  the 
American  Commission  in  1913,  and  two  of  these  were 
in  the  east  and  two  in  the  west  of  Canada.  Moreover, 
nine  provinces  have  passed  legislation  to  encourage  co- 
operation among  farmers  as  a  basis  for  agricultural  credit, 

242 


Canada's  Progress  in  Rural  Credits  243 

and  a  bill  has  been  introduced  in  the  House  of  Commons 
of  Canada  entitled  "  An  Act  respecting  Cooperative  Credit 
Societies."  The  subject,  therefore,  of  rural  credits  is  of 
general  interest  throughout  the  Dominion  at  the  present 
time. 

The  manifested  general  interest  in  this  subject  is  partly- 
due  to  the  fact  that  the  banks  in  Canada,  while  they  can 
make  loans  on  personal  security,  are  prohibited  by  law 
from  advancing  money  on  mortgage.  This,  of  course, 
greatly  hinders  the  farmer  from  realizing  on  the  land  as 
his  chief  asset.  Mortgage  loans  are  principally  made 
by  private  loan  and  mortgage  companies,  against  which 
the  complaint  has  been  made  that  their  rates  of  interest 
and  preliminary  fees  on  farm  loans  are  excessively  high. 
From  evidence  taken  before  the  Saskatchewan  Royal 
Agricultural  Credit  Commission  in  August,  1913,  it  ap- 
pears that  the  farmers  of  that  province  found  it  very  diffi- 
cult or  practically  impossible  to  secure  loans  from  banks 
on  personal  security  or  to  borrow  money  on  mortgage 
from  loan  and  mortgage  companies.  The  Canadian 
farmers,  therefore,  are  in  great  need  of  better  credit  facili- 
ties, and  efforts  are  being  made  to  promote  these  facilities 
for  the  improvement  of  rural  conditions. 

THE  SIZE    OF   FARMS 

As  has  already  been  stated,  farm  conditions  in  Canada 
are  very  similar  to  those  in  the  United  States  as  to  the 
economic  and  social  life  of  farmers,  the  size  of  farms, 
density  of  population,  and  many  other  factors  which 
enter  largely  into  the  rural  credit  problem.  The  following 
table  shows  the  distribution  and  size  of  farm  holdings  in 


244 


Principles  of  Rural  Credits 


the  whole  of  Canada  and  in  the  provinces  of  Manitoba 
and  Saskatchewan  as  derived  from  data  of  the  Dominion 
Census  for  1911: 


Size  of  holdings 


Under  1  acre 

I  to  under  5  acres . 
5  to  10  acres 

II  to  50  acres. 

51  to  100  acres. . . 
101  to  200  acres.  . 
201  acres  and  over 

Total 


All  Canada 


Number 

29,967 

43,710 

24,347 

88,964 

162,537 

228,236 

132,920 


710,681 


Manitoba 


Number 

1,280 

1,773 

791 

1,575 

2,103 

18,327 

20,498 


46,347 


Saskatch- 
ewan 


Number 
317 
246 
214 
729 
941 
48,366 
45,558 


96,371 


These  figures  show  that  large  farms  of  over  100  acres 
in  size  greatly  predominate  throughout  Canada.  In  the 
two  provinces  named,  which  are  characteristic  of  Western 
Canada,  small  farm  holdings  are  the  exception  rather 
than  the  rule.  The  greater  number  of  small  farms  are  in 
the  older  and  more  densely  settled  eastern  provinces, 
and  this  fact,  as  we  shall  see,  has  had  an  important  bear- 
ing on  the  development  of  the  Caisses  Populaires,  or 
People's  Banks,  of  Quebec,  Ontario,  and  so  on,  which  have 
by  far  the  largest  part  of  their  membership  composed  of 
farmers.  These  facts  in  themselves  are  sufficient  to  in- 
dicate that  the  isolation  of  farm  life  makes  the  economic 
and  social  life  conditions  of  Canadian  farmers  very  similar 
to  what  they  are  in  the  United  States  and  creates  the 


Canada's  Progress  in  Rural  Credits  245 

same  difficulties  in  promoting    agricultural   cooperation 
and  rural  credits. 

ENCOURAGEMENT    OF    COOPERATIVE    ORGANIZATION 

As  a  means  of  improving  rural  life  conditions  and  of 
overcoming  the  economic  difficulties  connected  with  large 
farms  and  a  scattered  population,  the  provincial  gov- 
ernments of  the  Dominion  of  Canada  have  for  many 
years  been  encouraging  the  development  of  cooperative 
societies  among  farmers.  This  is  in  marked  contrast  to 
our  state  and  national  governments  which  have  invariably 
disregarded  this  phase  of  the  agricultural  problem  and  its 
bearing  on  the  economic  welfare  of  the  producer  and  con- 
sumer of  farm  products.  While  great  diversity  prevails 
as  to  the  interpretation  of  the  word  "cooperation,"  much 
of  the  provincial  legislation  during  the  past  ten  or  fifteen 
years  has  had  in  mind  the  real  principles  of  cooperation, 
namely,  that  the  member  is  above  the  dollar.  The  rule 
for  many  of  these  organizations  is  that  they  aim  at  eco- 
nomic or  productive  purposes  only,  that  each  member 
has  only  one  vote,  and  that  the  annual  surplus  is  distrib- 
uted to  each  member  in  proportion  to  the  amount  of  busi- 
ness he  has  transacted  with  or  through  the  organization. 

At  the  same  time,  there  are  two  important  features 
that  are  characteristic  of  Canadian  cooperative  societies 
as  distinguished  from  those  of  Europe  and  which  have 
been  encouraged  by  provincial  legislation,  namely:  (1) 
Practically  all  of  the  cooperative  societies  in  Canada  are 
established  on  the  basis  of  limited  liability  of  the  members; 
and  (2)  the  aim  of  many  of  these  organizations  is  to  es- 
tablish and  build  up  a  reserve  fund  from  part  of  the 


246  Principles  of  Rural  Credits 

profits  in  order  to  safeguard  even  the  limited  liability  of 
members  in  case  of  unexpected  financial  losses  on  the  part 
of  the  society.  The  latter  feature  seems  to  have  been 
borrowed  from  the  rural  credit  plan  of  a  reserve  fund  which 
is  so  general  among  the  European  Raiffeisen  rural  credit 
banks. 

The  following  is  a  brief  survey  of  the  most  important 
legislative  provisions  passed  by  various  provinces  in  Canada 
for  the  encouragement  of  agricultural  cooperation.  Only 
the  most  typical  legislation,  under  which  important 
associations  with  a  large  membership  have  been  organized, 
has  been  noted. 

British  Columbia 

This  province  provided  for  cooperation  for  economic 
purposes  in  1897  by  the  "  Farmers'  Institutes  Cooperation 
Act."  The  law  was  amended,  partly  repealed,  and  re- 
enacted  in  subsequent  years  in  order  to  form  a  basis  for 
more  comprehensive  legislation  in  behalf  of  agricultural 
cooperative  societies.  As  it  now  stands  in  the  revised 
statutes  for  1913,  the  law  provides  that  twenty-five  or 
more  persons  may  unite  themselves  into  an  association 
for  the  following  purposes : 

(1)  The  manufacture  of  cheese,  butter,  cider,  jams, 
pickles,  and  spray  mixtures,  and  the  drying  and  canning 
of  fruit  and  vegetables. 

(2)  The  keeping  of  swine,  and  the  manufacture  and 
sale  of  the  various  products  resulting  therefrom. 

(3)  The  dealing  in  poultry,  eggs,  milk,  cream,  and  all 
other  agricultural  and  horticultural  products  and  in 
supplies  required  by  patrons  of  such  associations. 


Canada's  Progress  in  Rural  Credits  247 

(4)  The  dealing  in  flour,  feed,  fertilizers,  spray  materials, 
and  their  accessories,  and  in  foods  of  all  kinds  for  farm 
stock  for  the  purpose  of  supplying  the  same  to  the  patrons 
of  the  association. 

(5)  The  erection  and  maintenance  of  a  cold  storage 
plant  and  the  sale  of  ice. 

(6)  For  any  purpose  which  may  be  approved  by  the 
minister  of  agriculture  having  for  its  object  the  develop- 
ment of  agriculture. 

Under  this  law,  the  liability  of  a  shareholder  is  limited 
to  the  amount  of  his  share  or  shares  subscribed  for  and 
not  paid  up.  A  shareholder  may  hold  shares  to  an  amount 
not  to  exceed  one-fourth  of  the  share  capital,  and  each 
share  carries  one  vote. 

A  cooperative  society  organized  under  this  law  may 
borrow  of  the  provincial  government  of  British  Columbia 
a  sum  not  exceeding  80  per  cent  of  its  subscribed  capital 
for  the  purpose  of  erecting,  acquiring,  maintaining  or 
operating  within  the  province  any  of  the  agricultural 
industries  above  enumerated.  The  loan,  however,  is 
subject  to  specific  requirements  as  to  prospect  of  success 
within  a  six-mile  radius,  the  site  for  plant  and  buildings, 
plans,  and  so  on.  Loans  are  made  repayable  within 
twenty  years  at  4  per  cent  interest  and  with  a  sinking  fund 
or  amortization. 

Alberta 

The  Province  of  Alberta,  by  Chapter  12  of  the  Cooper- 
ative Associations  Act,  1913,  has  provided  that  seven  or 
more  persons  who  so  desire  may  associate  themselves 
together  as  an  incorporated  association  of  limited  lia- 


248  Principles  of  Rural  Credits 

bility,  for  the  purpose  of  carrying  on  any  cooperative 
store  or  business.  The  number  of  shares  which  may  be 
issued  is  unlimited,  but  no  member  can  have  more  than 
one  vote.  Shares  are  payable  in  installments  not  to  exceed 
25  per  cent  each.  No  member  is  entitled  to  draw  interest 
except  on  the  paid-up  portion  of  his  share  or  shares. 

The  rules  of  a  cooperative  society  organized  under  this 
law  may  provide  for  the  advancing  of  money  by  the 
association  to  members  on  the  security  of  real  or  personal 
property,  for  the  investment  of  any  part  of  the  society's 
capital  in  the  shares  or  on  the  security  of  any  other  society 
organized  under  the  same  law,  or  of  any  other  provincial 
corporation  of  limited  liability.  The  profits  of  the  society 
may  be  applied  to  any  lawful  purpose.  Disputes  between 
members  must  be  decided  by  a  board  of  arbitration,  and 
from  its  decision  there  is  no  appeal.  Any  two  or  more 
such  societies  may  federate. 

In  1913  the  Province  of  Alberta  passed  a  law  to  permit 
of  the  incorporation  of  the  Farmers'  Cooperative  Elevator 
Company.  By  the  law,  power  is  given  to  the  company 
to  construct,  acquire,  maintain  and  operate  grain  ele- 
vators within  the  province,  to  buy  and  sell  grain,  and 
to  do  all  things  that  are  generally  incidental  to  the  pro- 
duction, storing  and  marketing  of  grain.  But,  in  addition 
to  operating  grain  elevators,  the  company  may  act  as 
commission  or  general  agents  for  any  person,  company, 
or  corporation  in  the  purchase,  selling,  storing  and  de- 
livery of  any  goods  required  by  farmers.  This  company, 
however,  could  not  begin  business  until  twenty  local  soci- 
eties had  been  organized. 

A  local  elevator  could  be  organized  by  farmers  owning 


Canada's  Progress  in  Rural  Credits  249 

or  cultivating  an  annual  grain-crop  acreage  of  at  least 
6,000  acres  tributary  to  any  shipping  point  and  who  would 
subscribe  for  an  amount  of  stock  at  least  equal  to  the  value 
of  the  proposed  elevator.  Local  farmers  who  desired  an 
elevator  must  pay  20  per  cent  of  the  price  of  the  sub- 
scribed stock  before  the  erection  or  purchase  by  the 
company  of  such  elevator,  the  remaining  80  per  cent  to 
be  paid  within  four  years  from  the  date  of  subscription. 

A  member  of  the  Farmers'  Cooperative  Elevator  Com- 
pany can  hold  no  more  than  twenty  shares  of  stock  valued 
at  $60  each  and  has  only  one  vote. 

By  the  law,  provision  is  made  for  loans  from  the  pro- 
vincial government  of  Alberta  at  5  per  cent  for  the  pur- 
pose of  aiding  in  the  acquisition,  erection,  extension,  or 
remodelling  of  any  elevator,  the  loan  not  to  exceed  85 
per  cent  of  the  estimated  cost.  Out  of  the  surplus  profits 
a  dividend  not  exceeding  8  per  cent  may  be  paid  to  the 
shareholders.  From  any  balance,  the  directors  shall  set 
aside  such  amount  as  they  think  best  for  a  reserve  fund, 
and  divide  the  remainder  among  the  shareholders  and 
patrons  on  a  pro  rata  basis  according  to  the  business 
furnished  to  the  company  by  each  patron. 

Saskatchewan 

The  Saskatchewan  Agricultural  Cooperative  Associa- 
tions Act,  which  is  Chapter  62  of  the  Statutes  of  1913, 
provides  that  five  or  more  persons  may  incorporate  with 
limited  liability  for  the  purpose  of  purchasing  or  selling 
live  stock,  farm  products  and  supplies  on  the  cooperative 
plan  at  wholesale.  The  word  " supplies"  is  interpreted 
by  the  law  to  mean  building  and  fencing  material,  flour, 


250  Principles  of  Rural  Credits 

feed,  and  such  other  commodities  as  may  be  shipped  in 
car-load  lots  and  distributed  from  a  warehouse.  Of  the 
shareholders  of  an  association,  75  per  cent  must  be  agri- 
culturists, and  no  transfer  of  shares  is  allowed  which  would 
reduce  the  total  number  of  farmers  below  that  percentage. 
Each  member  has  only  one  vote  and  no  shareholder  can 
vote  by  proxy.  The  directors  must  so  apportion  the  net 
profits  as  (1)  to  set  aside  15  per  cent  for  a  reserve  fund 
until  that  fund  equals  at  least  30  per  cent  of  the  paid-up 
capital;  (2)  to  pay  interest  on  the  paid-up  capital  stock 
not  to  exceed  6  per  cent;  and  (3)  to  divide  the  remaining 
profits  among  the  patrons,  whether  shareholders  or  not, 
in  proportion  to  the  amount  of  business  transacted  with 
each  patron.  As  regards  the  last  point,  the  by-laws  may 
provide  that  the  dividend  due  a  non-shareholder  may  be 
retained  and  credited  to  him  on  account  of  capital  stock 
until  an  amount  has  accumulated  equal  to  the  par  value 
of  a  share.  The  patron  then  is  entitled  to  a  stock  certificate 
thereby  becoming  a  member  and  sharing  in  the  dividends 
like  other  shareholders. 

In  March,  1911,  the  Saskatchewan  Cooperative  Elevator 
Company  was  incorporated  by  the  provincial  legislature. 
The  law  gives  the  company  the  right  to  construct,  acquire, 
maintain  and  operate  grain  elevators  within  the  Province 
of  Saskatchewan,  to  buy  and  sell  grain,  and  generally  to  do 
all  things  incidental  to  the  production,  storing  and  market- 
ing of  grain.  The  capital  stock  of  the  company  may  be 
changed  from  time  to  time  by  the  provincial  government, 
because  it  loans  the  company  a  large  percentage  of  its 
subscribed  capital  and  therefore  retains  control  of  the 
amount  of  stock  the  company  may  issue.     Shares  are 


Canada's  Progress  in  Rural  Credits  251 

issued  at  $50  each;  they  can  only  be  held  by  farmers  and 
no  one  can  hold  more  than  twenty  shares.  Only  15  per 
cent  of  the  face  value  of  shares  need  be  paid  in  cash,  the 
remaining  85  per  cent  being  subject  to  call.  The  liability 
of  a  shareholder  is  limited  to  the  amount  of  his  stock. 
The  management  is  in  the  hands  of  a  board  of  nine 
directors. 

The  company  has  authority  to  establish  local  elevators. 
Any  number  of  shareholders  may  request  the  directors 
to  buy  or  build  an  elevator  at  their  shipping  point.  It 
must,  however,  appear  to  the  satisfaction  of  the  directors 
"  that  the  amount  of  shares  held  by  the  supporters  of  the 
proposed  elevator  is  at  least  equal  to  the  value  of  the  pro- 
posed elevator,  that  15  per  cent  of  the  amount  of  such 
shares  has  been  paid  up,  and  that  the  aggregate  annual 
crop  acreage  of  the  said  shareholders  represents  a  pro- 
portion of  not  less  than  2,000  acres  for  each  10,000 
bushels  of  elevator  capacity  asked  for."  These  require- 
ments are  designed  to  secure  the  support  of  a  sufficient 
number  of  grain-growing  farmers  to  insure  the  success  of 
the  local  elevator  even  without  the  aid  of  other  patrons. 
No  pledge  is  required  of  the  shareholder  to  ship  his  grain 
through  the  local  elevator;  he  is  as  free  as  any  other  farmer 
to  sell  and  ship  his  grain  as  he  pleases.  At  meetings  of 
local  elevator  shareholders,  each  member  has  one  vote  for 
each  share  held  by  him  up  to  five. 

For  the  work  of  organization,  the  law  provides  for  a 
provincial  loan  not  exceeding  $6,000  repayable  in  twenty 
annual  installments.  The  province  loans  to  the  company 
for  acquiring  or  erecting  a  local  elevator  a  sum  not  to 
exceed  85  per  cent  of  the  estimated  cost  of  the  elevator. 


252  Principles  of  Rural  Credits 

The  company  is  also  given  wide  borrowing  powers  on  the 
security  of  that  part  of  its  stock  not  paid  up,  of  grain,  of 
real  and  personal  property,  and  the  like. 

After  expenses  of  operating  and  maintaining  the  ele- 
vator and  the  installments  on  the  provincial  loans  have 
been  paid,  any  remaining  surplus  earned  by  the  company 
may  be  distributed  as  follows:  Shareholders  may  receive 
dividends  not  exceeding  10  per  cent;  any  surplus  over  and 
above  that  but  not  exceeding  50  per  cent  may  be  paid  at 
the  company's  discretion  (1)  to  the  shareholders  in  pro- 
portion to  the  amount  of  business  done  with  each  one; 
(2)  to  the  supporters  of  local  elevators  on  the  basis  of  their 
aggregate  relative  net  financial  results;  or  (3)  to  the  share- 
holders and  supporters  of  local  elevators  according  to 
each  of  the  two  preceding  schemes. 

Manitoba 

Chapter  36  of  the  Revised  Statutes  of  1902,  known  as  the 
Cooperative  Association  Act,  provides  that  any  seven  or 
more  persons  may  associate  themselves  together  with 
limited  liability  for  the  purpose  of  carrying  on  any  labor, 
trade  or  business,  wholesale  or  retail,  except  the  working 
of  mines,  minerals,  or  quarries,  and  the  business  of  bank- 
ing or  insurance.  The  capital  shall  be  in  transferable 
and  withdrawable  shares  which  may  be  payable  in  in- 
stallments not  exceeding  20  per  cent. 

The  best-known  cooperative  society  in  Manitoba  is  the 
Grain  Growers'  Grain  Company.  The  objects  of  the  com- 
pany are  "to  produce,  manufacture,  import,  export,  buy, 
sell,  deal  in  and  deal  with  all  cereals,  fruit,  vegetable, 
animal  or  other  products  of  the  farm;  all  products  or  by- 


Canada's  Progress  in  Rural  Credits  253 

products  thereof,  and  all  machinery,  implements,  goods, 
wares  and  merchandise  which  may  be  used  in  the  produc- 
tion and  manufacture  of  products  of  the  farm;  and  all 
articles,  substances  and  things  which  may  be  utilized  in 
the  said  production  or  in  the  maintenance,  cultivation, 
improvement  and  development  of  farms;  and  without 
restricting  the  generality  of  the  foregoing  expressions,  to 
carry  on  the  business  of  a  farmer  in  all  its  branches." 

This  company  was  an  outgrowth  of  three  great  agri- 
cultural associations  in  the  western  prairie  provinces — 
the  Saskatchewan  Grain  Growers'  Association,  the  Mani- 
toba Grain  Growers'  Association,  and  the  United  Farmers 
of  Alberta.  These  were  not  cooperative  societies,  but 
were  rather  associations  of  farmers  engaged  in  grain  grow- 
ing. By  their  constitutions  they  sought  (1)  "to  watch 
legislation  relative  to  the  grain  growers'  interests,  par- 
ticularly that  affecting  the  marketing,  grading,  and  dis- 
tribution of  their  grain ;  and  (2)  to  suggest  to  Parliament 
from  time  to  time  the  passing  of  any  new  legislation  to 
meet  changing  conditions  and  requirements." 

In  1905,  a  committee  was  appointed  by  these  associa- 
tions to  look  into  the  marketing  question.  The  outcome 
was  the  organization  of  the  Grain  Growers'  Grain  Company, 
Limited,  in  1906,  under  the  Manitoba  Joint-Stock  Com- 
panies Act,  for  the  purpose  of  doing  a  commission  business 
at  that  time  in  grain  only.  In  view  of  the  rapid  develop- 
ment of  its  business,  the  company  applied  for  a  Dominion 
charter  which  was  granted  by  Act  of  Parliament  in  May, 
1911.  By  that  Act,  the  capital  of  the  company  was 
placed  at  $2,000,000  divided  into  shares  of  $25  each, 
no  shareholder  being  allowed  to  hold  more  than  forty 


254  Principles  of  Rural  Credits 

shares.  Only  farmers,  farm  owners,  lessees  of  farms, 
or  their  wives  can  be  shareholders  except  by  a  resolution 
adopted  by  two-thirds  of  all  shareholders.  Each  share- 
holder has  only  one  vote.  If  the  profits  justify  it,  8  per 
cent  interest  can  be  paid  on  the  subscribed  capital  stock, 
and  provision  is  made  whereby  the  directors  can  set  aside 
a  part  of  the  profits  as  a  reserve  fund.  If  a  surplus  still 
remains,  it  is  distributed  among  shareholders  as  they 
themselves  by  resolution  in  annual  meeting  may  deter- 
mine. 

Ontario 

There  is  no  special  cooperative  law  in  Ontario.  Many 
cooperative  societies,  however,  have  been  organized  under 
the  old  general  Stock  Companies  Act  which  was  amended 
and  consolidated  in  Chapter  31,  Statutes  of  1912.  Under 
this  law  five  or  more  persons  may  form  a  cooperative 
society,  a  great  deal  of  latitude  being  permitted  as  to  the 
constitution  and  by-laws,  rules  and  regulations,  and  other 
matters  pertaining  to  organization  and  management 
of  such  associations.  As  a  basis  for  the  formation  of  co- 
operative societies  in  the  province,  the  Department  of 
Agriculture  has  adopted  certain  model  by-laws  which, 
however,  can  be  amended  at  any  time  to  suit  the  needs 
of  any  particular  society. 

Notwithstanding  the  absence  of  any  distinctive  law, 
agricultural  cooperation  thrives  in  Ontario,  especially  in 
the  packing,  grading  and  marketing  of  fruit.  It  is  also 
extending  to  the  purchase  of  farm  requirements  and  to 
other  branches  of  agriculture  besides  fruit  growing.  A 
great  number  of  these  societies  have  by  their  by-laws 


Canada's  Progress  in  Rural  Credits  255 

carefully  safeguarded  certain  cooperative  features  such  as 
limiting  membership  to  producers  only,  granting  a  member 
only  one  vote  or  limiting  the  amount  of  stock  any  member 
can  hold,  and  providing  for  a  pro  rata  distribution  of 
profits  in  accordance  with  the  quantity  and  quality  of  the 
product  furnished  by  each  member. 

The  grouping  of  various  societies  as  units  into  federa- 
tions for  mutual  benefits  is  also  encouraged  by  the  pro- 
vincial government.  In  1906,  thirteen  scattered  societies 
united  under  the  name  of  "The  Cooperative  Fruit  Grow- 
ers of  Ontario."  Another  federation  organized  a  number 
of  years  ago  is  the  St.  Catharines  Cold  Storage  and  For- 
warding Company,  which  is  rapidly  extending  its  business. 
A  more  recent  federation  is  that  of  the  Ontario  and  West- 
ern Cooperative  Fruit  Company,  Limited,  with  a  share 
capital  of  $75,000  at  $5  a  share.  The  shareholders  are 
organized  into  local  societies  which  are  semi-independent. 
The  company  proposes  to  establish  canning  and  jam 
factories  and  cold  storage  warehouses  in  addition  to  its 
business  of  marketing  fruit  and  furnishing  certain  farm 
supplies  to  its  members.  The  Ontario  Department  of 
Agriculture  and  the  provincial  secretary  encourage  the 
organization  and  development  of  cooperative  societies 
by  means  of  publications. 

Quebec 

The  legislature  of  Quebec  has  passed  three  laws  to  pro- 
mote cooperative  organization  by  farmers'  clubs,  stock 
breeders,  and  agricultural  associations.  (1)  Farmers' 
clubs  of  any  county  or  territorial  division  may  form  a 
cooperative  society  by  passing  collectively  or  in  each 


256  Principles  of  Rural  Credits 

club  resolutions  to  that  effect.  The  society  becomes 
organized  if  the  resolutions  are  sent  to  and  are  approved 
by  the  minister  of  agriculture,  who  gives  official  notice 
accordingly.  The  clubs  composing  the  society  retain 
their  rights  and  privileges  as  individual  organizations. 

(2)  The  revised  statutes  provide  for  the  organization 
of  stock  breeding  syndicates.  The  object  of  a  syndicate 
is  to  breed  and  improve  farm  stock.  By  law  it  may  pro- 
duce, hire,  breed,  and  sell  pure-bred  live  stock,  grant 
premiums  for  the  keeping  of  breeding  animals,  and  pur- 
chase all  products  and  implements  connected  with  the 
breeding,  feeding,  and  maintaining  the  health  of  farm 
animals.  Syndicates  are  organized  as  joint-stock  com- 
panies with  limited  liability,  and  shares  are  valued  at 
$10  payable  in  five  annual  installments  of  $2  each. 

(3)  Cooperative  agricultural  associations  have  been 
established  in  nearly  all  the  leading  agricultural  counties 
of  the  province.  Among  the  objects  of  these  associations 
are:  The  improvement  and  development  of  any  or  all 
branches  of  agriculture;  the  manufacture  of  butter  and 
cheese;  the  purchase  and  sale  of  live  stock,  farm  imple- 
ments, commercial  fertilizers  and  other  necessary  agri- 
cultural articles;  and  the  purchase,  transformation  and 
sale  of  farm  products.  An  association  must  consist  of  at 
least  twenty-five  persons  to  form  a  joint-stock  company 
with  variable  capital  and  limited  liability,  shares  being 
valued  at  S10  payable  in  annual  installments  of  SI  each. 
Agricultural  associations,  farmers'  clubs,  and  dairy  so- 
cieties may  take  shares  in  an  association.  A  board  of 
directors  administers  without  remuneration  the  business 
affairs  of  an  association  and  may  borrow  on  the  security 


Canada's  Progress  in  Rural  Credits  257 

of  the  unpaid  portions  of  the  subscribed  shares.  Each 
shareholder  has  one  vote  for  every  share  of  stock  he  holds 
upon  which  at  least  one  installment  has  been  paid.  The 
general  meeting  of  members  distributes  the  profits  and 
provides  for  a  reserve  fund.  So  long  as  a  reserve  fund  does 
not  equal  the  subscribed  capital,  the  dividends  distributed 
cannot  exceed  6  per  cent  of  the  paid-up  capital.  When 
the  reserve  fund  becomes  greater  than  the  subscribed 
capital,  after  not  more  than  6  per  cent  has  been  paid  in 
dividends  and  at  least  10  per  cent  of  the  profits  has  been 
set  aside  for  a  reserve  fund,  an  association  may  distribute 
the  balance  of  the  profits  among  the  shareholders  in  pro- 
portion to  their  business  with  the  association.  The  books 
are  at  all  times  to  be  open  to  the  inspection  of  members. 
The  law  provides  that  an  association's  property  shall  be 
exempt  from  provincial  taxation. 

Prince  Edward  Island 

While  no  general  law  provides  for  agricultural  coopera- 
tion in  this  province,  two  separate  laws  provide  for  specific 
forms  of  cooperation. 

(1)  The  Cooperative  Fruit  Company  was  incorporated 
in  1909  with  a  capital  of  810,000.  Its  objects  are  to  buy, 
sell,  pack,  export,  and  otherwise  deal  in  fruits  and  vege- 
tables of  all  kinds;  also  to  establish  mills  or  factories  for 
the  manufacture  of  boxes,  barrels,  crates,  cans,  packages 
and  all  other  things  needed  in  its  business. 

(2)  In  1914  the  Cooperative  Egg  and  Poultry  Associa- 
tion Act  was  passed.  Its  objects  are:  (a)  To  encourage 
the  production  and  marketing  of  eggs  and  poultry  and  all 
matters  connected  therewith;  (b)  to  supervise  and  encour- 


258  Principles  of  Rural  Credits 

age  such  commercial  enterprises  as  are  deemed  advisable 
by  the  association  to  facilitate  the  more  profitable  pro- 
duction and  disposal  of  the  eggs  and  poultry  of  local  circles; 
(c)  to  encourage  the  purchase,  breeding  and  distribution 
of  improved  strains  of  high-producing  stock.  These  efforts 
are  aided  by  the  live-stock  branch  of  the  Dominion  Depart- 
ment of  Agriculture. 

In  addition  to  these  important  lines  of  cooperative  work, 
many  of  the  farmers'  institutes,  although  they  have  no 
legal  standing,  market  lambs  for  their  members  and  also 
purchase  for  them  seeds,  flour,  and  other  farm  necessaries. 

New  Brunswick 

This  province  has  passed  no  direct  cooperative  legisla- 
tion. Chapter  46  of  the  Revised  Statutes  of  1903,  how- 
ever, is  an  Act  respecting  the  incorporation  of  societies 
for  the  sale  and  distribution  of  seed  grain,  and  it  provides 
that  such  societies  may  be  formed  by  not  less  than  nine 
persons.  At  the  organization  of  a  seed-grain  society, 
each  prospective  member  is  required  to  sign  a  certificate 
stating  the  quantity  of  grain  he  expects  to  contribute  for 
sale  annually. 

Without  definite  organization,  however,  the  members 
of  many  of  the  agricultural  societies  frequently  cooper- 
ate for  certain  purposes.  Nearly  all  of  them  buy  pure- 
bred live  stock,  improved  seed,  and  high-grade  fertilizers 
for  their  members  on  a  cooperative  basis. 

Nova  Scotia 

By  Chapter  33  of  the  Statutes  of  1908,  it  is  provided 
that  a  limited  joint-stock  company  can  be  formed  by  at 


Canada's  Progress  in  Rural  Credits  259 

least  five  persons  with  a  capital  of  not  less  than  $1,000,  of 
which  one-half  must  be  subscribed.  The  Act  provides 
that  each  shareholder  is  entitled  to  one  vote  for  every 
share  of  stock  he  holds  and  no  provision  is  made  limiting 
the  number  of  shares  of  stock  any  member  can  hold.  This 
follows  the  rules  for  joint-stock  rather  than  cooperative 
organizations.  Nevertheless,  later  laws  permit  of  a  cen- 
tralized organization  which  follows  more  specifically 
cooperative  principles. 

By  Chapter  63  of  the  Statutes  of  1913,  any  number  of 
companies  not  less  than  ten  incorporated  under  the  above 
Statutes  of  1908  may  form  themselves  into  a  central 
company  for  the  following  purposes:  (1)  To  buy,  sell, 
barter,  take  on  consignment  or  dispose  on  consignment, 
pack  and  deal  in  fruit,  fodder,  and  other  farm  produce 
as  well  as  fertilizers  and  artificial  manures  of  all  kinds; 
arsenate  of  lead,  spraying  materials  and  all  kinds  of  in- 
secticides and  fungicides,  power  spraying  outfits,  hand 
pumps,  and  all  other  commodities  or  materials  incidental 
to  their  use;  nails,  pulp  heads,  paper,  and  all  material 
necessary  for  the  purpose  of  packing  fruit  and  farm  prod- 
uce, flour,  feeds,  and  all  milling  produce;  seeds,  farming 
implements,  tools,  wagons,  and  all  manner  of  merchandise. 

(2)  To  warehouse  the  same,  as  well  with  cold  storage 
as  otherwise;  to  market  and  transport  the  same;  and  to 
carry  on  the  business  of  warehousemen  and  shippers  of 
such  fruit,  fodder  and  other  farm  produce. 

Each  company  which  desires  to  become  a  shareholder 
in  a  central  company  appoints  three  of  its  own  shareholders 
as  its  representatives  for  the  purpose  of  its  organization. 
These  representatives  elect  the  officers  of  the   central 


260  Principles  of  Rural  Credits 

company,  and  after  being  registered  the  central  can  do 
business.  Dividends  from  the  profits  may  be  declared  to 
the  shareholders  in  proportion  to  the  amount  paid  up  on 
their  respective  shares,  or  the  profits  may  be  used  for  any 
of  the  company's  business  purposes,  or  they  may  be  used 
to  create  a  reserve  fund. 

In  1912,  no  less  than  27  joint-stock  companies,  formed 
under  authority  of  the  above  law,  had  become  affiliated 
into  the  "United  Fruit  Company  of  Nova  Scotia,  Lim- 
ited," which  had  an  authorized  capital  of  $50,000,  of 
which  $42,000  had  been  subscribed.  Upon  organization 
each  affiliated  company  subscribes  20  per  cent  of  its 
authorized  capital,  and  may  be  called  upon  by  the  central 
company  for  additional  subscriptions  of  not  more  than 
25  per  cent  at  one  time.  All  the  affiliated  societies  agree 
to  give  the  central  association  complete  control  of  all  their 
fruit.  All  apples  are  pooled  and  average  prices  are  re- 
turned to  the  companies  according  to  the  class  and  grade 
of  their  fruit. 

It  is  to  be  observed  that  the  central  company  is  ac- 
complishing the  chief  purpose  of  cooperation  in  that  the 
grower  sells  his  product  direct  to  the  consumer,  and  also 
takes  advantage  of  an  organization  which  furnishes  him 
necessary  supplies  for  his  business  direct  from  the  producer 
at  much  lower  prices  than  he  could  secure  them. 

Under  this  law,  a  large  number  of  farmers'  cooperative 
and  fruit  packers'  associations  have  been  formed  and  are 
in  successful  operation  besides  the  United  Fruit  Company. 
A  number  of  them  conduct  cooperative  farmers'  stores,  in 
which  all  sorts  of  commodities,  including  seeds  and  fer- 
tilizers, are  bought  and  sold. 


Canada's  Progress  in  Rural  Credits  261 

RELATION   OF  LEGISLATION  TO   RURAL   CREDITS 

From  this  brief  summary  of  legislation  in  Canada  to 
promote  agricultural  cooperation,  it  is  evident  that  con- 
siderable progress  has  been  made.  At  the  same  time,  a 
lack  of  uniformity  evidently  prevails  in  cooperative  legis- 
lation by  the  different  provinces  and  not  always  has  there 
been  a  strict  adherence  to  the  first  principles  of  coopera- 
tion. Some  provinces  have  gone  so  far  in  promoting 
cooperation  as  to  undertake  to  partly  finance  a  few  of  the 
more  important  enterprises,  but  always  on  a  strict  business 
basis  and  without  the  slightest  feature  of  paternalism. 

The  main  purpose  of  this  provincial  aid  may  be  con- 
strued as  a  means  of  developing  agriculture  and  coopera- 
tive marketing  by  those  provinces  whose  prosperity  is 
almost  wholly  dependent  upon  farming.  This  aid  takes 
the  form  of  furnishing  money  for  cooperative  undertak- 
ings at  reasonable  rates  of  interest  and  with  the  least 
trouble  and  at  the  lowest  cost  to  the  borrowing  farmers' 
cooperative  societies  for  preliminary  and  incidental  ex- 
penses.   And  all  these  are  laudable  objects. 

The  movement,  however,  has  a  greater  significance  in 
its  relation  to  the  real  problem  of  financing  the  farmer  on 
the  basis  of  both  personal  and  mortgage  credit.  While 
the  efforts  in  these  directions  may  seem  insignificant  as 
yet  in  the  face  of  the  difficulties  of  the  rural  credit  problem, 
still  a  beginning  has  been  made.  It  is  also  to  be  borne  in 
mind  that  the  problem  of  agricultural  credit  is  almost  as 
new  to  Canada  as  it  is  to  the  United  States.  But  with  a 
firm  basis  laid  in  the  extension  of  cooperative  organiza- 
tions throughout  the  Dominion  and  a  more  or  less  sys- 


262  Principles  of  Rural  Credits 

tematic  official  propaganda,  the  fruits  of  rural  credit  are 
bound  to  appear  later  as  they  did  in  the  various  European 
countries.  In  fact,  the  efforts  that  have  been  put  forth 
in  the  past  to  organize  cooperative  rural  credit,  especially 
the  more  difficult  phase  of  personal  or  short-time  loans, 
have  already  been  fruitful  of  good  results  as  the  following 
chapter  will  make  clear. 


CHAPTER   XVIII 

PERSONAL   AND   MORTGAGE   CREDIT   FOR 
FARMERS   IN    CANADA 

Efforts  to  overcome  the  difficulties  of  the  rural  credit 
problem  in  Canada  have  been  made  along  the  lines  of 
both  personal  and  mortgage  loans  to  farmers.  The  size 
of  farms  and  the  density  of  the  rural  population  have  in 
large  measure  determined  the  kind  of  credit  organization 
that  has  been  needed  in  different  parts  of  the  Dominion. 
In  the  more  densely  settled  older  sections  of  Eastern 
Canada,  where  the  farms  are  much  smaller  than  they  are 
in  the  west,  the  need  for  personal  credit  has  been  more 
particularly  felt.  Here  rural  credit  societies  for  making 
short-time  personal  loans  have  been  developed. 

On  the  other  hand,  the  need  of  mortgage  credit  has 
been  more  pronounced  in  Western  Canada,  where  the 
population  is  widely  scattered  and  the  farms  very  large 
in  size.  It  seems  advisable,  therefore,  to  consider  briefly 
the  results  thus  far  attained  in  promoting  these  phases 
of  rural  credits  among  the  farmers  of  Canada. 

PEOPLE'S  BANKS  IN   CANADA 

While  the  people's  banks  are  not  strictly  rural  institu- 
tions, the  percentage  of  their  membership  is  now  so  over- 
whelmingly composed  of  farmers  that  the  name  could 
well  be  changed  to  "rural  banks."  These  popular  banks 
in  Canada  owe  their  origin  and  success  to  the  untiring 

263 


264  Principles  of  Rural  Credits 

energy  of  Alphonse  Desjardins,  a  public-spirited  citizen 
of  Point  Levis,  Quebec.  The  first  bank  was  established 
in  the  latter  place  on  December  6,  1900,  and  commenced 
business  on  January  23d  of  the  succeeding  year.  From 
Quebec,  these  banks  spread  to  Ontario  and  have  even 
made  their  way  into  some  of  the  most  northerly  states 
of  New  England. 

The  principles  on  which  the  Canadian  banks  operate 
are  a  modification  of  the  Schulze-Delitzsch  system.  This 
was  founded  on  the  unlimited  liability  of  all  members  for 
the  debts  of  the  society.  Desjardins  has  abolished  every 
form  of  liability  by  adopting  what  is  known  as  the  "  capital 
variable,"  which  means  that  deposits  can  be  withdrawn 
either  at  will  or  by  giving  30  days'  notice  at  the  utmost. 
The  principles  of  Desjardins  banks,  therefore,  conform 
almost  entirely  to  those  of  the  uncapitalized  savings- 
banks  in  the  United  States.  Desjardins  was  forced  to 
adopt  this  plan  for  the  reason,  as  he  states,  that  the  people 
in  Quebec  would  never  have  accepted  the  unlimited 
liability  of  Schulze-Delitzsch  banks  nor  the  limited  lia- 
bility of  the  Luzzatti  "Banche  Popolari"  of  Italy. 

The  principles  of  management  greatly  resemble  the 
Raiffeisen  rural  credit  banks.  Each  society  or  bank  is 
carried  on  by  three  committees.  (1)  The  Council  of 
Administration  controls  the  admission  of  new  members, 
supervises  the  transfer  or  withdrawal  of  stock,  selects 
the  manager  who  alone  draws  a  salary,  and  overlooks 
the  management  of  the  business.  (2)  The  Credit  Com- 
mittee determines  the  amount  of  credit  each  member  can 
receive  and  passes  on  all  applications  for  loans.  (3)  The 
Council  of  Supervision,  which  is  elected  by  the  share- 


Credit  for  Farmers  in  Canada  265 

holders,  forms  a  permanent  board  of  audit  and  general 
supervision. 

The  capital  of  each  society  is  not  only  variable,  but  it  is 
raised  by  selling  shares  at  $5  each  and  by  receiving  de- 
posits, on  which  savings-bank  interest  rates  are  paid. 
Shares  of  stock  may  be  paid  for  by  small  installments. 
Every  applicant  for  membership  has  to  be  approved  by 
the  Council  of  Administration,  the  by-laws  requiring  that 
he  must  be  honest,  punctual  in  his  payments,  sober,  of 
good  habits,  industrious  and  laborious. 

Of  each  year's  profits  20  per  cent  is  applied  to  the  re- 
serve fund.  An  entrance  fee  of  10  cents  is  also  applied 
to  the  same  fund.  Each  society  also  has  a  Providence 
Fund  raised  by  an  assessment  of  10  per  cent  on  the  annual 
profits.  This  fund  is  maintained  until  it  reaches  a  maxi- 
mum of  one-half  the  annual  profits  distributed  on  the 
paid-up  shares.  This  fund  has  been  established  to  pro- 
tect the  reserve  fund,  since  it  is  designed  to  meet  any  calls 
which  threaten  the  stability  of  the  credit  society. 

For  the  first  six  years  after  the  establishment  of  the 
bank  at  Point  Levis,  there  was  no  protecting  legislation, 
and  during  this  period  only  two  banks  were  organized. 
But  in  1906,  the  Quebec  Syndicates  Act  was  passed  as  a 
means  of  promoting  the  cooperative  credit  movement. 
This  law  aims  to  regulate  the  formation  of  cooperative 
societies  for  production,  consumption,  and  credit.  By 
its  provisions,  the  territory  within  which  such  a  society 
can  do  business  are  the  limits  of  the  provincial  electoral 
district,  and  the  responsibility  of  members  is  limited  to 
the  amount  of  their  respective  shares.  Only  persons  within 
the  electoral  area  can  become  members. 


266  Principles  of  Rural  Credits 

Since  1906,  no  less  than  150  of  these  people's  banks  have 
been  formed  in  Canada,  of  which  number  130  are  in  the 
Province  of  Quebec  and  20  in  the  French-speaking  districts 
of  eastern  Ontario.  The  membership  of  these  banks  is 
abqut  66,000,  of  which  90  per  cent  are  fanners  and  about 
10  per  cent  wage-earners.  The  average  loan  is  between 
$10  and  $150,  although  larger  loans  are  sometimes  made. 
These  banks  have  been  of  great  assistance  to  the  farming 
communities  in  Quebec.  In  the  Point  Levis  district, 
several  long-standing  mortgages  have  been  paid  off  by 
means  of  loans  from  the  people's  banks,  since  the  borrowers 
pay  a  lower  rate  of  interest,  which  is  about  6  per  cent. 
Notwithstanding  the  fact  that  these  banks  are  small 
affairs,  the  annual  business  now  amounts  to  nearly  nine 
million  dollars.  Mortgage  business,  however,  is  not  the 
aim  of  these  banks.  In  the  words  of  the  organizer,  their 
purpose  is  '"to  lend  small  sums  to  members  on  personal 
security,  and  the  honesty  of  the  borrowers  is  considered 
rather  than  his  holdings  in  the  bank.  The  banks  work 
within  a  very  small  area  where  everyone  is  known  to  all 
the  shareholders,  and  where  every  shareholder  is  interested 
in  the  repayment  of  the  loans. " 

The  success  of  the  people's  or  semi-rural  banks  in  the 
older  provinces  of  Quebec  and  Ontario  is  due  in  no  small 
degree  to  the  fact  that  rural  conditions  there  more  nearly 
conform  to  those  in  Europe.  The  population  is  more 
dense,  is  largely  of  foreign  origin  and  familiar  with  co- 
operative principles,  and  is  industrious,  thrifty  and  honest; 
the  farms  and  other  holdings  are  much  smaller  than  in 
other  parts  of  Canada;  the  population  is  more  stable, 
families  living  in  the  same  village  and  often  on  the  same 


Credit  for  Farmers  in  Canada  267 

holdings  for  generations.  These  are  precisely  the  rural 
conditions  which  make  for  success  with  banks  for  small 
personal  loans,  especially  if  the  leadership  of  the  right 
persons  can  be  secured,  and  they  differ  widely  from  the 
conditions  of  farm  life  which  prevail  in  the  grain-growing 
western  provinces  or  in  a  great  part  of  the  United  States. 
Desjardins  has  organized  23  of  these  banks  in  Mac 
chusetts  and  New  Hampshire,  but  to  what  extent  this 
movement  will  spread  in  the  less  densely  settled  parts  of 
the  country  the  future  alone  will  determine.  Where,  how- 
ever, the  conditions  are  such  as  to  offer  the  prospect  of 
success,  the  Desjardins'  type  of  semi-rural  bank,  in  which 
farmer  and  wage-earner  can  unite  their  savings,  affords 
a  good  opportunity  for  supplying  cheap  money  for  short- 
time  loans  on  personal  security.  But  the  basis  of  their 
success  is  evidently  due  to  the  real  cooperative  spirit 
among  the  members. 

FARM   MORTGAGE   CREDIT   IN   SASKATCHEWAN 

The  only  province  in  Canada  that  has  passed  farm- 
mortgage  legislation  is  Saskatchewan.  This  province  sent 
two  delegates  to  Europe  with  the  American  Commission 
in  1913  to  study  rural  credits.  On  their  return  the  pro- 
vincial government  appointed  a  commission  to  tour  the 
province  for  the  purpose  of  ascertaining  the  real  state  of 
mortgage  credit  among  farmers  and  whether  they  would 
be  willing  to  try  some  form  of  cooperation  for  raising 
money  on  mortgage. 

From  the  evidence  presented  to  this  official  agricultural 
commission  by  farmers,  bankers,  loan  agents,  and  others, 
the  following  significant  facts  were  ascertained: 


268  Principles  of  Rural  Credits 

That  in  some  districts  of  Saskatchewan  nearly  every  farm 
was  mortgaged,  while  for  the  whole  province  more  than 
80  per  cent  of  all  farms  are  mortgaged;  that  it  has  always 
been  difficult  to  raise  money  from  banks  and  mortgage 
companies,  but  that  in  1913  it  was  practically  impossible  to 
secure  loans  on  farm  mortgage  from  them;  that  interest 
rates  usually  range  from  9  to  14  per  cent,  one  instance 
only  being  recorded  where  it  was  as  low  as  7  per  cent  and 
one  where  it  was  15  per  cent;  that  the  preliminary  fees 
which  a  farmer  had  to  pay  before  he  could  obtain  a  loan 
were  very  high  and  even  extortionate;  that  the  average 
size  of  farms  was  295  acres,  on  which  the  average  in- 
debtedness was  about  $1,500  or  $5  to  the  acre;  and  that 
during  the  15  months  ended  August  15,  1913,  there  had 
been  1,723  mortgage  sale  proceedings  in  the  province. 

On  the  subject  of  whether  farmers  would  be  willing  to 
try  some  form  of  cooperative  mortgage  credit,  the  evi- 
dence shows  that  out  of  fifteen  districts  in  which  the  com- 
mission asked  the  question,  two  replied  in  the  negative, 
five  answered  unqualifiedly  in  the  affirmative,  four  would 
be  willing  if  the  provincial  government  would  back  the 
movement,  and  three  would  be  willing  if  no  government 
aid  whatever  should  be  given. 

This,  in  brief,  is  the  farm  credit,  mortgage  indebted- 
ness, and  cooperative  situation  in  Saskatchewan.  It 
was  regarded  by  the  provincial  commission  as  serious, 
and  immediate  steps  were  taken  to  remedy  conditions 
by  legislation.  The  outcome  was  "An  Act  to  incorporate 
the  Saskatchewan  Cooperative  Farm  Mortgage  Associa- 
tion," which  was  passed  December  19,  1913.  The  follow- 
ing is  a  summary  of  the  main  provisions  of  the  law: 


Credit  for  Farmers  in  Canada  269 

The  association  will  consist  of  three  commissioners 
appointed  by  the  lieutenant-governor  of  the  province  and 
of  farmers  and  others  who  will  become  members.  It  will 
be  an  aggregate  of  groups  or  units  composed  of  at  least 
10  members  each  and  not  less  than  twenty-five  groups. 
Each  member  must  be  an  applicant  for  a  loan  and  must 
be  willing  to  join  with  other  members  and  the  association 
in  pledging  his  credit  and  security  for  the  loans  of  other 
members  of  his  group  to  an  extent  not  exceeding  50  per 
cent  of  his  own  loan.  New  members  may  join  on  being 
accepted  by  at  least  two-thirds  of  the  members  of  any 
group.  If  any  member  should  default  in  his  payments, 
and  the  property  on  being  sold  fail  to  realize  the  amount 
of  his  indebtedness  to  the  association,  the  other  members 
of  his  group  can  be  called  upon  to  pay  their  contingent 
liability  on  a  pro  rata  basis. 

Loans  can  be  made  on  first  mortgages  only,  and  the 
association  is  forbidden  to  advance  more  than  40  per 
cent  of  the  value  of  the  farm  land  taken  as  security.  At 
no  time  is  the  association  permitted  to  loan  more  money 
than  the  amount  of  mortgage  security  it  holds.  The  asso- 
ciation is  given  authority  to  issue  bonds  on  the  security 
of  the  mortgages,  and  the  lieutenant-governor  is  author- 
ized, "on  such  terms  and  conditions  not  inconsistent  with 
the  provisions  of  this  Act  as  may  be  agreed  upon  with  the 
association,  to  guarantee  the  payment  of  the  principal 
and  interest  of  the  mortgage  bonds  of  the  association  to 
the  extent  agreed  upon  with  the  association  from  time  to 
time." 

The  affairs  of  the  association  are  also  to  be  administered 
by  the  three  provincial  commissioners  appointed  by  the 


270  Principles  of  Rural  Credits 

lieutenant-governor,  only  one  of  whom  is  to  receive  a 
salary,  the  other  two  being  entitled  only  to  a  "per  diem 
allowance  and  their  actual  cost  of  transportation  to  and 
from  meetings  of  the  commissioners  or  upon  other  busi- 
ness of  the  association."  Moreover,  to  get  the  association 
started,  "the  lieutenant-governor  in  council  shall  have 
power  to  pay  from  the  general  revenues  of  the  province 
the  salary  of  the  managing  commissioner  for  a  term  of  three 
years  and  to  pay  to  the  commissioners  any  sum  not  exceed- 
ing the  amount  granted  by  the  legislature  for  that  purpose 
which  may  be  required  to  cover  the  expenses  incurred  in 
the  organization  of  the  association  and  of  the  local  groups." 

The  law  provides  for  the  repayment  of  loans  on  the 
amortization  plan  of  semi-annual  or  annual  installments 
of  principal  and  interest;  the  rate  of  interest  to  be  charged 
on  loans  shall  be  only  sufficient  to  pay  the  interest  on 
and  the  cost  of  marketing  its  securities,  the  expenses  of 
conducting  the  business  of  the  association,  and  the  crea- 
tion of  a  reserve  fund.  A  member  may  also  make  an  addi- 
tional payment  on  his  loan  on  any  regular  interest  date 
providing  he  gives  the  commissioners  three  months' 
previous  notice  in  writing  to  that  effect. 

The  above  provision  that  the  provincial  government 
may  guarantee  the  association's  bonds  was  made  because 
it  was  recognized  that  it  would  be  practically  impossible 
to  raise  any  large  sum  of  money,  either  within  the  province 
itself  or  in  Canada,  on  the  security  of  mortgage  bonds 
bearing  a  low  rate  of  interest. 

While  this  law  has  been  passed  it  has  not  yet  been 
brought  into  operation.  Section  34  provides  that  it  shall 
not  come  into  effect  until  proclaimed  by  the  lieutenant- 


Credit  for  Farmers  in  Canada  271 

governor  in  council.  But  from  the  time  of  the  enactment 
of  the  law  in  December,  1913,  to  the  present  time  condi- 
tions in  the  money  markets  of  Europe  have  been  such  as 
to  preclude  the  possibility  of  placing  new  and  unknown 
securities.  Consequently,  the  Saskatchewan  Act  has  not 
yet  been  brought  into  operation.  This  will  be  done,  how- 
ever, as  soon  as  the  European  money  market  improves. 

The  benefits  anticipated  for  Saskatchewan  farmers 
under  this  Act  are  the  obtaining  of  loans  for  a  long  period 
of  time,  ranging  from  fifteen  to  thirty-five  years,  at  a  low 
rate  of  interest;  the  possibility  of  repaying  a  loan  at  any 
time  under  easy  conditions;  the  impossibility  of  over- 
burdening farms  with  debt  owing  to  the  limitation  of  40 
per  cent  of  the  appraised  value;  and  the  consequent  in- 
centive to  increase  the  value  of  farms. 

This  law  follows  in  broad  outlines  the  methods  of  the 
German  Landschaften  or  farm-mortgage  associations. 
But  it  differs  from  the  Landschaften  materially  in  its 
provisions  for  government  aid  and  supervision,  for  the 
mutual  consent  of  two-thirds  of  a  group  to  the  admission 
of  a  new  member,  and  for  the  liability  of  members  of 
groups  to  the  extent  of  50  per  cent  of  each  one's  own  loan 
toward  the  indebtedness  of  a  defaulting  member.  But 
what  the  final  outcome  of  this  law  will  be  can  at  the  pres- 
ent time  only  be  conjectured.  It  is  at  least  an  attempt 
to  inaugurate  a  better  farm-mortgage  credit  system  for  the 
farmers  of  Saskatchewan. 

Canada's  cooperative  credit  societies  bill 

As  a  means  to  promote  economy  and  thrift  by  coopera- 
tive savings  and  credit  societies,  and  that  legislation  re- 


272  Principles  of  Rural  Credits 

specting  the  incorporation  and  management  of  such  so- 
cieties should  be  uniform  throughout  Canada,  a  bill  was 
introduced  into  the  House  of  Commons  of  Canada  dur- 
ing the  session  of  1914  by  Arthur  Meighen,  solicitor- 
general. 

The  bill  contemplates  the  uniform  organization  and 
management  of  people's  cooperative  credit  banks,  both 
urban  and  rural.  Under  this  bill,  societies  may  be  in- 
corporated which  have  for  their  object  the  receiving  of 
moneys  on  deposit  from  members  and  the  making  of 
loans  to  members  with  or  without  security.  Any  number 
of  persons  not  less  than  seven  may  be  incorporated  as  a 
society.  The  word  "cooperative"  has  to  be  included  in 
the  name  of  every  society  which  shall  be  managed  by  a 
board  composed  of  at  least  five  members  elected  by  the 
annual  general  meeting.  The  society's  capital  must  be 
created  by  shares  which  shall  not  be  less  than  one  dollar 
each.  No  member  can  have  more  than  one  vote.  Ten 
per  cent  at  least  of  a  society's  profits  has  to  be  set  aside 
as  a  guarantee  fund  to  meet  losses.  "No  society  shall 
advance  money  by  discount,  loan  or  otherwise  to,  nor  ac- 
cept deposits  from,  any  person  other  than  members 
thereof;"  and  no  officer  except  the  manager  is  permitted 
to  receive  a  salary  or  any  compensation  whatever  for 
services  rendered  to  the  society.  Various  other  regula- 
tions regarding  the  supervision  of  accounts,  investment 
of  funds,  the  making  of  contracts,  and  other  business 
matters  are  contained  in  the  bill,  all  of  which  follow  very 
closely  the  powers  of  officers  connected  with  Raiffeisen 
or  Schulze-Delitzsch  credit  banks,  after  which  they  seem 
to  be  closely  patterned.    Penalties  are  also  prescribed  for 


Credit  for  Farmers  in  Canada  273 

failure  of  a  society  registered  under  the  bill  to  fulfill  all 
its  provisions. 

A   PLAN   FOR   STATE   AID 

This  summary  of  the  rural  credit  problem  in  Canada 
shows  that  it  differs  very  little  from  that  in  the  United 
States.  The  farms  are  large  and  the  life  of  farmers  is 
isolated.  The  application  of  any  ready-made  European 
credit  system  to  agricultural  conditions  in  America  seems 
very  difficult,  and  even  when  attempts  are  made  to  adapt 
either  the  Raiffeisen  personal  credit  system  or  the  Land- 
schaft  mortgage  credit  plan  to  suit  farm  conditions  in 
the  western  hemisphere,  they  do  not  seem  to  be  able  to 
move  with  success.  There  is  nothing  magical  in  the  word 
"cooperation"  toward  establishing  a  workable  rural 
credit  system  where  farmers  are  unable  or  unwilling  to 
organize;  and,  evidently,  the  conditions  of  farm  life  in  the 
largest  part  of  Canada  make  a  cooperative  plan  of  either 
personal  or  mortgage  credit  more  likely  to  fail  than  to 
succeed. 

However,  there  is  open  to  the  provinces  of  Canada,  as 
well  as  to  our  own  states,  a  rational  plan  of  government 
aid,  fostered  on  a  strict  business  basis,  such  as  the  common- 
wealths of  Australia  and  New  Zealand  have  carried  out. 
The  system  was  instituted  in  the  State  of  Victoria,  Australia, 
in  1896,  and  it  has  been  modified  by  the  different  states  to 
meet  their  own  agricultural  conditions.  In  general,  the 
system  is  as  follows: 

The  money  for  state  loans  is  raised  by  means  of  4  per 
cent  mortgage  bonds  and  is  loaned  to  farmers  at  a  uniform 
rate  of  5  per  cent.    The  mortgage  security  for  loans  ranges 


274  Principles  of  Rural  Credits 

from  one-half  to  three-fourths  of  the  appraised  value  of 
the  property.  Repayment  of  loans  is  on  the  amortization 
plan,  principal  and  interest  being  repayable  in  semi- 
annual installments  so  that  the  loans  are  paid  off  in  twenty 
to  forty-two  years  at  the  option  of  the  borrower.  In  most 
states,  repayment  on  the  principal  is  not  required  for 
the  first  five  years  after  a  loan  has  been  granted,  though 
the  borrower  is  allowed  the  privilege  of  repaying  any 
amount  on  the  principal  at  any  time  he  so  desires.  This 
system  of  state  loans  has  become  quite  general  throughout 
Australia  and  New  Zealand. 

The  benefits  of  this  plan  of  financing  the  farmer  may 
be  judged  by  a  brief  statement  on  its  operation  in  Victoria 
where  it  began.  In  June,  1912,  the  amount  of  loans  to 
farmers  was  $14,773,000;  the  amount  repaid  $8,053,900. 
On  repayments  ten  farmers  were  in  arrears  and  that  to  the 
sum  of  $468  only.  In  fifteen  years,  the  State  Savings- 
Bank,  which  makes  the  loans,  had  foreclosed  and  sold 
only  twenty-eight  farms,  at  a  loss  of  a  very  trifling  sum 
on  one  farm  only.  This  comparative  freedom  from  loss 
is  attributed  to  an  effective  method  of  farm  inspection, 
appraisement,  and  granting  of  loans.  Many  applications 
for  loans  are  rejected  on  the  basis  of  insufficient  security 
and  the  character  and  industry  of  the  applicant. 

The  chief  reasons  for  establishing  this  system  of  state 
loans  to  farmers  were  precisely  the  same  as  prevail  in  the 
United  States  and  Canada,  namely,  high  rates  of  interest, 
difficulty  in  borrowing  money  at  all,  loans  for  short  periods 
only,  and  renewal  charges  frequent  and  excessive.  All 
these  difficulties  were  avoided  by  state  loans,  and  the 
effect  was  instantaneous.     Hundreds  of  debt-burdened 


Credit  for  Farmers  in  Canada  275 

farmers,  struggling  against  oppressive  credit  conditions, 
transferred  their  mortgages  from  banks  and  private 
lenders  to  the  easier  conditions  of  state  mortgage  loans. 
Not  only  was  the  interest  much  lower,  but  other  charges 
are  merely  nominal  under  the  state  system  of  loans.  On 
farms  accessible  by  rail  in  Victoria,  the  inspection  fee  is 
$12.17;  if  situated  at  a  distance  off  the  railway,  a  small  pro 
rata  increase  is  made  in  the  fee.  The  total  additional 
charge  to  the  borrower  for  the  registration  and  preparation 
of  the  mortgage  deed  is  only  $3.65,  or  a  total  expense  of 
$15.82.  This  would  cover  the  costs  of  a  mortgage  loan 
running  from  twenty  to  forty-two  years,  and  it  is  prac- 
tically typical  of  the  Australian  system. 

Where  farm  conditions  are  such  as  to  preclude  the  possi- 
bility of  establishing  a  cooperative  mortgage  credit  sys- 
tem with  any  great  prospect  of  success,  a  state  loan  system 
seems  to  be  both  feasible  and  beneficial.  The  statesman 
must  no  longer  look  at  the  problem  from  a  political  point 
of  view,  but  rather  from  the  broader  view  of  economics 
and  sociology.  If  a  system  like  that  of  Australia  and  New 
Zealand  can  be  conducted  without  loss  to  the  state  and 
with  benefit  to  the  farmer,  the  state  as  a  whole  reaps  the 
reward  in  increased  prosperity,  and  this  in  itself  is  a  suffi- 
cient justification  for  state  loans  to  farmers.  Under  farm 
and  financial  conditions  which  prevail  in  Canada,  as  well 
as  in  the  United  States,  neither  country  would  go  far 
afield  in  giving  it  a  fair  trial  at  once  or  in  the  near  future. 


CHAPTER  XIX 
SUMMARY  AND  CONCLUSION 

The  foregoing  pages  set  forth  the  main  features  of 
European  rural  credit  systems  and  their  lessons  for  Ameri- 
can farmers.  By  means  of  this  study  on  financing  the 
farmer,  it  is  now  possible  to  summarize  the  essential  steps 
for  placing  rural  credits  on  a  firm  basis  in  the  United  States 
and  Canada. 

1.  The  organization  of  farmers  into  cooperative  soci- 
eties. Not  only  should  the  farmers  themselves  undertake 
to  bring  this  about,  but  state  laws  should  be  passed  to 
facilitate  the  formation  of  such  business  organizations  in 
agriculture.  The  following  seventeen  states  have  already 
passed  such  laws:  California,  Connecticut,  Florida,  Idaho, 
Illinois,  Kansas,  Maine,  Massachusetts,  Michigan,  Minne- 
sota, Montana,  Nebraska,  New  York,  North  Dakota, 
Oregon,  Washington,  and  Wisconsin. 

With  a  view  to  the  future  federation  of  these  cooper- 
ative societies  into  an  active  national  organization,  there 
should  be  as  much  uniformity  as  possible  in  their  rules  and 
regulations.  Both  European  and  American  experience 
shows  that  the  statutes  of  cooperative  societies  should 
provide  for  certain  definite  powers  to  assure  their  success. 
These  powers  should  be  as  follows : 

(a)  An  association  should  select  and  determine  the 
character  of  its  own  membership. 

276 


Summary  and  Conclusion  277 

(b)  It  should  limit  the  amount  of  stock  any  member 
may  hold. 

(c)  No  member  should  have  more  than  one  vote. 

(d)  The  profits,  if  any,  should  be  distributed  to  the 
members  on  the  basis  of  the  amount  of  business  trans- 
acted by  each  with  the  organization  or  should  be  held  as  a 
reserve  fund  against  the  possibility  of  future  losses. 

These  are  the  recognized  principles  of  agricultural 
cooperative  societies.  In  the  state  laws  that  have  already 
been  passed,  these  four  features  have  been  incorporated, 
but  in  a  few  states  the  laws  limit  the  use  of  the  word  "  co- 
operative." It  would  be  well  in  all  cases  to  define  in  the 
law  what  is  meant  by  this  term,  and  its  use  in  any  other 
sense  should  be  made  illegal  in  the  names  of  business  or- 
ganizations. This  would  protect  farmers  from  any  effort, 
on  the  part  of  joint-stock  companies,  to  discredit  their 
associations,  and  it  would  also  establish  them  on  a  sound 
cooperative  basis  which  has  been  found  to  be  the  key-note 
to  success  throughout  Europe. 

2.  Protection  of  farmers  against  usurious  conditions. 
This  is  unquestionably  the  first  duty  of  every  state  in  the 
Union.  These  conditions  are  the  result  of  various  indirect 
methods  of  rendering  null  and  void  the  laws  against 
usurious  interest  on  loans.  If  this  reform  should  be  in- 
stituted, more  than  half  the  difficulties  surrounding  the 
problem  of  financing  landowning  and  tenant  farmers 
would  be  removed  at  once;  and,  if  it  is  not  done,  the  hope 
of  establishing  a  sound  rural  credit  system  is  well-nigh 
groundless. 

3.  State  long-time  loans  to  farmers  on  first  mortgage 
at  reasonable  rates  of  interest  and  on  the  amortization 


278  Principles  of  Rural  Credits 

plan  of  repayment.  This  is  only  as  a  means  of  immediate 
relief  against  the  present  crude  and  expensive  mortgage 
system,  of  affording  farmers  an  avenue  of  escape  from 
the  clutches  of  the  money  shark,  and  until  cooperative 
credit  associations  have  been  successfully  organized  by 
farmers. 

4.  The  adoption  of  a  more  rational  and  less  expensive 
system  of  land  registration.  The  Torrens  system  has  been 
briefly  presented  and  its  advantages  pointed  out.  This 
would  be  the  means  of  saving  legal  expenses  which  now 
make  the  costs  of  borrowing  on  mortgage  exceedingly  high. 

5.  An  educational  propaganda  by  the  national  govern- 
ment on  the  principles  of  agricultural  cooperation  and  on 
the  proper  use  of  credit.  This  seems  to  be  the  most 
necessary  work  that  the  national  government  can  do 
toward  establishing  a  sound  system  of  rural  credits. 

With  these  steps  taken  by  the  farmers  themselves  and 
by  our  state  and  national  governments  for  the  protection 
and  instruction  of  farmers,  the  problem  of  rural  credits 
will  be  more  than  half  solved.  The  principles  of  mutual 
help  and  self-help  should  never  be  set  aside  for  state  aid. 
But,  by  protecting  the  farmer  against  credit  conditions 
which  are  extremely  burdensome  and  by  granting  tempor- 
ary relief  from  these  conditions  by  means  of  state  loans 
advanced  on  strict  business  principles,  the  state  will 
simply  be  doing  its  duty  in  behalf  of  a  large  body  of  its 
citizens  whose  work  is  subject  to  the  control  of  the  forces 
of  nature,  who  have  been  and  are  still  more  or  less  the 
prey  of  social  parasites,  and  whose  economic  efficiency 
is  very  dependent  upon  a  better  credit  system  than  now 
prevails. 


Summary  and  Conclusion  279 

From  these  points  of  view,  the  state  would  be  laying  the 
basis  not  only  of  a  sound  rural  credit  system,  but  of  its 
own  economic  prosperity.  For  these  reasons  alone,  any 
attempt  on  the  part  of  state  legislatures  to  finance  the 
farmer  more  satisfactorily  than  is  being  done  at  present 
is  to  lay  the  foundation  of  a  better  economic  and  social 
rural  life.  If  this  little  book  should  aid  at  all  in  bringing 
this  about,  it  will  not  have  been  written  in  vain. 


BIBLIOGRAPHY 

The  following  list  of  books,  pamphlets  and  articles  has  been 
selected  with  a  view  of  providing  for  students  a  general  historical 
survey  of  rural  credits,  together  with  different  discussions  and 
interpretations  of  the  movement.  The  principles  of  rural  credits, 
as  outlined  in  this  volume,  have  been  deduced  as  a  result  of  a 
study  of  these  bibliographical  references. 

Adams,  E.  F.  Credit  Facilities  for  Rural  Districts.  Sound  Cur- 
rency, Sept.,  1901,  pp.  145-182. 

Agricultural  Cooperation  and  Rural  Credit  in  Europe.  Senate 
Doc.  214,  63d  Cong.,  1st  Sess.  Part  I,  Information  and 
Evidence.  Washington,  1913.  Part  II,  Bibliography. 
Washington,  1914. 

Agricultural  Credit  and  Cooperation  in  Italy.  International 
Institute  of  Agriculture,  Rome,  1913. 

Agricultural  Credit.  Land-mortgage  or  Long-term  Credit. 
Report  of  the  United  States  Commission  to  investigate  and 
study  in  European  countries  cooperative  land-mortgage 
banks,  cooperative  rural  credit  unions,  and  similar  organiza- 
tions and  institutions  devoting  their  attention  to  the  pro- 
motion of  agriculture  and  the  betterment  of  rural  conditions. 
Parts  I  and  II,  with  legislation  suggested.  Sen.  Doc.  380, 
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281 


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INDEX 


Agricultural  associations,  loans      Ashland  plan  of  loans  to  dairy 
by  people's  banks,  30,  32 

Agricultural  Central  Loan  Bank 
for  Germany,  22 

Agricultural  cooperation  among 
farmers  in  United  States, 
239;  encouragement  in  Can- 
ada, 242,  245 

Agricultural  cooperative  socie- 
ties, principles,  276 

Agricultural  cooperative  supply 
associations  in  Italy,  34 

Agricultural  credit.  (See  Rural 
credit.) 

Agriculture,  characteristics,  146; 
Imperial  Council  of,  Berlin, 
237;  value  of  credit  in,  146. 
(See,  also,  Farming.) 

Alberta,  encouragement  of  co- 
operation, 247 

American  Commission  on  rural 
credits,  xvi,  158 

Amortization,  defined  and  illus- 
trated, 192 

Amortization  of  farm-mortgage 
loans,  83,  99,  115,  118,  121, 
123,  124,  128,  132,  134,  136, 
137,  139,  191,  193,  196,  198, 
199,  212,  270,  274,  277 

Amortization,  outlook  for,  200 


men,  175 

Australia,  state  aid  to  farmers 
in,  273 

Austria,  rural  credit  banks  in, 
10;  Schulze-Delitzsch  banks 
in,  28 

Austro-Hungarian  Bank,  farm- 
mortgage  loans  by,  125 

Bank  debentures,  issue  of,  in 
Hungary,  115 

Bank  of  France,  aid  to  farms  by, 
50,  54;  charter  privileges,  46; 
cost  of  administration,  49;  in- 
terest rates  and  discounts,  45 

Banks,  district  or  regional  in 
France,  44;  farm-mortgage 
loans  by,  121;  state-endowed 
mortgage  in  Hungary,  102. 
(See,  also,  Rural  credit  banks.) 

Bavaria,  trustee  investments  in, 
122 

Belgium,  farm  holdings,  4;  farm- 
mortgage  loans,  131 

Bibliography  of  rural  credits, 
281 

Bonds,  mortgage,  trustee  invest- 
ments in,  122.  (See,  also, 
Farm-mortgage  bonds.) 


289 


290 


Index 


British  Columbia,  encourage- 
ment of  cooperation,  246 

Building  and  loan  associations 
in  New  York,  197;  in  Ohio, 
198,  212 

Boring,  farm-mortgage  credit 
system,  79 

Canada,  cooperative  credit  soci- 
eties bill,  271;  credits  for 
farmers,  263;  encouragement 
of  cooperation,  245;  need  of 
farmers'  organizations,  161; 
number  and  size  of  farms,  243; 
people's  banks,  263;  progress 
of  cooperation  and  rural  cred- 
its, 242 

Canton  banks  in  Switzerland, 
farm-mortgage  loans  by,  137 

Capital,  productive,  for  farmers, 
168 

Cooperative  Central  Bank  of 
Eindhoven,  133 

Credit  abuses,  protection  of 
fanners  against,  178 

Credit  conditions  in  Canada,  243 

Credit  Foncier,  mortgage  loans 
to  farmers  by,  135 

Credit  for  farmers  in  Denmark, 
69;  in  France,  70;  in  Italy, 
30,  35;  need  and  importance 
of,  xiv,  60,  61,  152,  156,  221 

Credit  plans  of  F.  W.  Raiffeisen,9 

Credit  to  agricultural  supply 
associations  in  Italy,  35,  37 

Credit  unions  in  Massachusetts, 
184;  in  New  York,  197 


Credit,  value  in  agriculture,  146. 
(See,  also,  Rural  credits.) 

Dairymen,   Ashland   loan   plan 

to,  175 
Dane    County,    Wis.,    interest 

rates,  172 
Debentures,  issue  in  Hungary, 

115;  in  Joliet,  111.,  200 
Denmark,    government    aid    to 

farmers  in,  69 

Eindhoven  Cooperative  Central 
Bank,  133 

Emilia,  Italy,  cooperative  farm- 
ing in,  66 

England,  government  aid  to 
farmers  in,  72 

Europe,  communal  farm  life,  6; 
exploitation  of  small  farmers, 
8;  farmers'  organizations,  236; 
low  costs  of  farm  loans,  181; 
mortgage  credit,  139;  origin 
of  rural  credit,  7 

Farm  holdings  in  Belgium,  4; 
in  Canada,  243;  in  Germany, 
3,4 

Farm  laborers,  basis  of  credit 
for,  60;  cooperative  farming 
by,  65,  68;  government  aid 
to,  69,  70,  72;  loans  in  Italy 
to,  67 

Farm-land  bonds.  (See  Farm- 
mortgage  bonds.) 

Farm  life,  communal,  in  Eu- 
rope, 6 


Index 


291 


Farm-loan  conditions  in  United 
States,  173 

Farm  loans,  advantages  of  co- 
operation in,  200 

Farm-mortgage  bonds,  issue  and 
sale,  81,  86,  92,  114,  140,  197, 
200,  202 

Farm-mortgage  cooperative  so- 
cieties, advantages  and  merits, 
93;  difficulties  of  organizing 
in  United  States,  166;  in 
Germany,  89,  92;  organiza- 
tion, 79,  88,  166 

Farm-mortgage  credit  in  Europe, 
characteristics,  139 

Farm-mortgage  indebtedness  in 
Massachusetts,  186;  in  New 
York,  171;  in  Saskatchewan, 
242,  268;  in  United  States,  191 

Farm-mortgage  legislation  in 
Saskatchewan,  267 

Farm-mortgage  loans,  amortiza- 
tion.    (See  Amortization.) 

Farm-mortgage  loans  by  insur- 
ance companies,  213;  in  Aus- 
tria, 101,  102, 125;  in  Belgium, 
131;  in  France,  135;  in  Ger- 
many, 97,  121,  123,  124;  in 
Holland,  133;  in  Hungary, 
104,  115,  125;  in  Italy,  127; 
in  Ohio,  199;  in  United  States, 
153,  208;  in  various  countries, 
137;  reduction  of  costs,  181 

Farm  mortgages,  Torrens  sys- 
tem of  registering,  182 

Farm  owners,  store  credit  for, 
156 


Farm  supply  societies,  functions, 
16 

Farm  tenancy,  growth  in  United 
States,  150 

Farm  tenants,  basis  of  credit  for, 
60;  economic  functions,  229; 
government  aid  to,  71;  in 
United  States,  xiv,  150,  221; 
membership  in  rural  banks  in 
Italy,  62;  protection  of  loans 
to,  64;  store  credit  for, 
156 

Farmers'  Cooperative  Elevator 
Company  of  Alberta,  248 

Farmers,  cooperative  organiza- 
tion, 235,  239 

Farmers,  danger  of  indebted- 
ness by,  167;  importance  of 
credit  facilities  for,  152;  in 
Schulze-Delitzsch  banks,  28; 
indebtedness  of,  171;  need  of 
credit  for,  xiv;  personal  loans 
to,  11,  30;  protection  against 
usury,  178,  277;  relation  of 
Department  of  Agriculture 
to,  238;  state  loans  to,  209, 
211,  273 

Farmers'  organizations,  236,  237 

Farming,  cooperative,  65,  68; 
precariousness,  147,  169 

Farms,  small,  development  in 
Hungary,  114 

Ferrara,  Italy,  cooperative  farm- 
ing in,  67 

Flammersfeld,  establishment  of 
rural  bank,  9 

France,  aid  to  farmers  by,  70; 


292 


Index 


district  or  regional  banks,  44; 
rural  credit  system,  43 

German  government,  relation  to 
farmers'  organizations,  236 

Germany,  Agricultural  Central 
Loan  Bank  for,  22;  farm 
holdings,  3,  4;  farm-mortgage 
mutual  associations,  89;  regis- 
tration of  land  titles,  141; 
rural  credit  banks,  10;  rural 
population,  5;  savings-banks, 
122 

Government  aid  for  collective 
long-time  credit  in  France, 
56;  to  farmers  in  various 
countries,  46,  56,  69,  70,  72; 
to  mortgage  banks  in  Hun- 
gary, 103;  to  peasants  in 
Russia,  118;  to  rural  banks  in 
France,  46 

Grain  Growers'  Grain  Company 
of  Manitoba,  252 

Hanover  Provincial  Mortgage 
Credit  Bank,  100 

Heddesdorf,  establishment  of 
loan  bank  in,  9 

Holland,  farm-mortgage  loans 
in,  133 

Hungarian  Central  Cooperative 
Credit  Society,  39,  107,  112 

Hungarian  Land-Mortgage  In- 
stitute, 103 

Hungary,  cooperative  farming, 
68;  development  of  small 
farms,  114;  farm-mortgage 
loans,  125;  issue  of  farm-land 


bonds,  114;  organization  of 
cooperative  rural  credit  banks, 
37;  state-endowed  mortgage 
credit  banks,  102 

Idaho,  loans  to  farmers  by,  211 

Imperial  Council  of  Agriculture 
at  Berlin,  237 

Indebtedness  of  farmers,  danger, 
167,  223;  in  United  States, 
171.  (See,  also,  Farm-mort- 
gage indebtedness.) 

Indiana,  loans  to  farmers  by,  211 

Insurance  companies,  farm  loans 
by,  213 

Interest  rates  by  people's  banks 
in  Germany,  32;  in  Italy,  35; 
by  savings-banks  in  Italy,  35, 
129;  in  various  states,  211;  on 
farm-mortgage  loans  in  United 
States,  153,  174,  215;  signifi- 
cance to  farmers,  170 

Investments  in  mortgage  bonds, 
122 

Investors  in  farm-mortgage 
bonds,  protection,  202 

Iowa,  loans  to  farmers  by,  211 

Italy,  cooperative  farming  in, 
65;  cooperative  supply  asso- 
ciations, 34;  endowment  of 
people's  banks,  32;  farm  ten- 
ants in  rural  banks,  62,  227; 
rural  credit  banks,  10;  short- 
time  loans  by  people's  banks, 
31 

Joliet  bank,  amortization  of 
mortgage  loans,  199 


Index 


293 


Joint-stock  banks  in  Germany, 
121;  in  Hungary,  125 

Land  bank,  central,  in  New 
York,  197 

Land  banks,  cooperative,  in  Wis- 
consin, 173 

Land-improvement  banks  in 
Prussia,  99,  137 

Land-Mortgage  Bank  of  Spain, 
138 

Land  titles,  registration  in  Euro- 
pean countries,  141;  Torrens 
system  of  registration,  182 

Landowners  as  creditors  of  ten- 
ant farmers,  61,  225;  economic 
functions,  229;  store  credit 
for,  156 

Landschaften.  (See  Farm-mort- 
gage cooperative  societies.) 

Landwirtschaftsrat,  relation  to 
German  government,  236 

Liability,  unlimited,  defined  and 
explained,  13 

Life  insurance  companies,  farm 
loans  by,  213 

Live  stock  raising,  precarious- 
ness,  147 

Loans,  Ashland  dairy  plan  for, 
175;  by  people's  banks,  31;  by 
Raiffeisen  banks,  11;  to  farm 
laborers  in  Italy,  67;  to  ten- 
ants by  rural  banks,  64 

Manitoba,  encouragement  of  co- 
operation, 252;  number  and 
size  of  farms,  244 


Massachusetts,  farm-mortgage 
loans,  196;  farms  mortgaged, 
186;  issue  of  farm-land  bonds, 
204;  people's  banks,  267;  rural 
credits  legislation,  184 

Milan,  cooperative  farming  in, 
65 

Mortgage  banks,  state-endowed, 
in  Hungary,  102;  in  Russia, 
117 

Mortgage  bonds.  (See  Farm- 
mortgage  bonds.) 

Mortgage  debentures,  issue  in 
Hungary,  115 

Mortgage  foreclosure,  protec- 
tion against,  184,  186 

Mortgage  loans  in  Germany, 
121 

Mortgages,  methods  of  repay- 
ment compared,  195 

National  Federation  of  Hun- 
garian Land  Mortgage  Insti- 
tutes, 110 

National  government,  relation 
to  rural  credits,  232,  278 

National  Small  Holdings  Land 
Mortgage  Institute  in  Hun- 
gary, 105 

New  Brunswick,  encouragement 
of  cooperation,  258 

New  Hampshire,  people's  banks, 
267 

New  York,  building  and  loan 
associations,  197,  206;  central 
land  bank,  197;  issue  of  farm- 
land bonds,  197,  204 


204 


Index 


New  Zealand,  state  aid  to  farm- 
ers, 273 

Nobility  Land-Mortgage  Bank 
in  Russia,  118 

North  Dakota,  loans  to  farmers 
by,  211 

Nova  Scotia,  encouragement  of 
cooperation,  258 

Ohio,  building  and  loan  associa- 
tions, 198 

Oklahoma,  loans  to  farmers  by, 
211 

Ontario  and  Western  Coopera- 
tive Fruit  Co.,  255 

Ontario,  encouragement  of  co- 
operation, 254;  people's  banks, 
266 

Oregon,  loans  to  farmers  by,  211 

Orphans'  funds,  investment  in 
Prussia,  84 

Padua,  Italy,  cooperative  farm- 
ing in,  67 

Peasant  proprietors,  mortgage 
loans  in  Prussia,  86 

Peasants,  government  aid  in 
Russia,  118 

People's  banks,  endowment  in 
Italy,  32;  in  Canada,  263; 
loans  to  farmers  in  Europe  by, 
27,  29,  31,  35 

Piacenza  federation  of  coopera- 
tive supply  associations,  36 

Population,  rural,  density  in 
Germany  and  United  States,  5 

Prince  Edward  Island,  encour- 
agement of  cooperation,  257 


Provincial  mortgage  credit  banks 
in  Germany,  97;  in  Austria, 
101 

Prussia,  farm-mortgage  loans, 
99,  124;  farm-mortgage  mu- 
tual associations,  90,  166;  in- 
vestment of  widows'  and  or- 
phans' funds,  84;  mortgage 
loans  to  peasant  proprietors, 
86;  organization  of  Land- 
schaften,  79;  registration  of 
land  titles,  141 

Quebec,  encouragement  of  co- 
operation, 255;  people's  banks, 
266 

Raiffeisen  cooperative  supply 
societies,  functions,  16 

Raiffeisen,  F.  W.,  rural  credit 
plans,  9,  22 

Raiffeisen  rural  banks,  aid  to  by 
people's  banks,  30;  difficulties 
of  organizing  in  United  States, 
164;  formation  of  central,  21; 
in  France,  44;  modification, 
33,  37;  principles,  10;  rules 
and  regulations,  14 

Roumania,  cooperative  farming 
in,  68 

Rural  bank  buildings  in  Europe, 
20 

Rural  banking  practices  in  Eu- 
rope, 19,  20 

Rural  banks,  aid  to  by  Bank  of 
France,  54;  government  aid  in 
France  to,  46,  48,  50,  56;  in 


Index 


295 


France,  statistics,  #9;  member- 
ship and  capital  163    -  - 
tion  of  loans  to  tenants. 
relatione  of  local  and  regional. 
--^emberahip    in 
Italy.  62 
Rural   cooperative    societies   in 

I  rem  meet  a 
Rural  credit  legislation  in  France, 
46;  societies  in  various  coun- 
ts, 10 
Rural  credits,  appropriatio- 
-..„-. ..  ■ ....  «:.  .-•;•  r-_\  ■    •  ■: .  :  - 
ies,    240:    basis,    23 
bibhograj:  general  in- 

terest. :  "••  .-.  ;-...:  m  in 
Massachusetts.  184*  legisla- 
B  requirements  in  United 
176;  organiiation  of 
sions,  xv,  •  |  rob- 
n,  152.  160:  progress  in 
.  .  _• 
in  United  States,  17  ■ 
relation  of  national  govern- 
ment, 232.  .'"•    -:ate  aid      I 

b    m 

Rural  population  in  Germany, 
5:  in  United  State*    5    152 

Rusk  County,  Wis,,  interest 
rates,  1". 

FiUssia.  fann-mortgage  banks, 
117.  137:  government  aid  to 

■ 


Saskatchewan  Cooperative  Ele- 
vator Company,  250 
Saskatchewan   CoSperstive 


"gage    Association, 

-    ■ 
"N-MLstchewan,  encouragement  of 

cooperation,  249;  farm-mort- 
gage indebtedness    MS     . 

farm-mortgage  legislation  in, 

267;  number  and  sme  of  farms, 

.  ■  •    .   ■ 
Savings-bank  funds  fat  fanasrn, 

B  35 
-..gs-banks.     farm-mortgage 

loans  I.       -        -4.  125.  125. 

139;    in    Germany.    122:    in- 
raal  rates  in  Ita;  pen 

accounts  to  fanners,  131 
Saxony.    Landschaft    bank    in, 

•■ 
School  funds,  investment  in  farm 

mortgages,  210 
Schulxe-Delitxsch  banks  in  Ger- 
many. 28.  32 
Sicily,   cooperative  fanning  in, 

"   B 
Soil    fertility,    exploitation    by 

I  nant  fanning.  224 

:a.  loans  to  fanners 

by.  211 
Southern  Commercial  Congress, 

organiiation  of  rural  credits 

commission,  xv.  IS 
Spain,  fann-mortgage  loans  in, 

■ 
State  aid  for  rural  credits,  273, 

-•" 
State-endowed  mortgage  credit 

banks    in    Hungary.    102;   in 

Russia.  117 


296 


Index 


State  legislatures,  promotion  of 

rural  credits  by,  189 
State  loans  to  farmers,  209 
Store  credit  for  farmers,  156 
Switzerland,  farm-mortgage 

loans  in,  137 

Tenant  farming  in  Italy,  62,  227; 
parties  interested,  223 

Tenants,  farm.  (See  Farm  ten- 
ants.) 

Torrens  system  of  registering 
land  titles,  182 

Trustee  investments  in  mortgage 
bonds,  122 

Tuscany,  tenant  farming  in,  62, 
228  ' 

United  Fruit  Company  of  Nova 

Scotia,  260 
United   States   Commission   on 

Rural  Credits,  xvi,  158 
United    States    Department    of 

Agriculture,      appropriations, 


239;  relation  to  farmers, 
238 

United  States,  farmers'  organi- 
zations, 237;  farm-loan  condi- 
tions, 173;  farm-mortgage  in- 
terest rates,  153,  170;  growth 
of  farm  tenancy,  150;  need  of 
farmers'  organizations,  161; 
need  of  rural  credits,  178 

Unlimited  liability,  denned  and 
explained,  13 

Usurious  conditions,  protection 
of  farmers  against,  277 

Utah,  loans  to  farmers  by,  211 

Victoria,  Australia,  state  aid  to 
farmers,  274 

Wales,  government  aid  to  farm- 
ers in,  72 

Widows'  funds,  investment  in 
Prussia,  84 

Wisconsin,  land-mortgage  co- 
operative banks,  173 


Printed  in  the  United  States  of  America. 


[pv  1     195? 


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UC  SOUTHERN  REGIONAL  LIBRARY  FACILITY 


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